News & Insights

The Australian: Dividend machine clicks into gear

Yield-hungry investors will be buoyed by the early signs of resilience across corporate Australia from the latest profit season.

Of the major ASX-listed companies that have reported their results, most have been able to increase or hold their dividends in the face of an uncertain outlook due to the global economic slowdown that’s been exacerbated by the US-China trade war. Of course, the busiest part of the full-year reporting period lies ahead and the picture could change.

Of 168 companies in the S&P/ASX 200 index due to report their results in August, 22 per cent have reported so far. By the end of next week, that proportion will have risen to 80 per cent, giving analysts a good read on how companies are tracking.

So far it looks like a “normal” reporting season, with no sign of companies hunkering down for a long slowdown or recession, analysts say.

And there’s been none of the extreme caution that emerged in corporate outlooks leading into the global financial crisis of 2008.

As far as their earnings go, 23 per cent of reporting companies have beaten estimates, while 54 per cent have been in line with expectations and 23 per cent have fallen short, says Bell Potter’s head of institutional sales and trading, Richard Coppleson.

That should be reassuring for sharemarket investors aiming to replace passive income that’s been squeezed by the great bond market rally.

Australian 10-year bonds now yield less than 1 per cent and are well into negative territory on an inflation-adjusted basis.

The expected 12-month forward yield on the S&P/ASX 200 fell to a nine-year low of about 4.2 per cent last month as the index hit a record high of 6875 points. At 4.4 per cent yesterday it was still below its long-term average of around 4.7 per cent.

But with bonds yielding less than 1 per cent, the additional yield, or “equity risk premium” available from the sharemarket, is now a very attractive 3.7 per cent. In fact it recently exceeded the post-GFC peak due to the simultaneous fall in bond yields and sell-off in shares.

The trade war may have eased after the US said it would delay additional tariffs on certain Chinese imports until December 15 while also exempting some goods, but there’s still about $US15 trillion ($22 trillion) of government and corporate bonds on negative nominal yields as the global economy slows and central banks signal they will press ahead with interest rate cuts and in some cases quantitative easing.

In that environment investors will continue to pay a premium for defensive and high-yielding companies in the sharemarket.

Of course there’s still some risk to earnings as the global economic slows and the domestic economy is yet to respond to monetary and fiscal stimulus, less restrictive macroprudential policy and a lessening of policy risk after the federal election.

While the property market has stabilised after the biggest fall since the early 1980s, most hard data points continue to deteriorate and sentiment-based measures are yet to show any net improvement after hitting multi-year lows around the time of the election.

NAB’s monthly business survey for July — conducted after two interest rate cuts from the Reserve Bank but before tax cuts were passed by parliament last month — shows business conditions are diverging significantly to the downside versus the ASX 200.

The recent divergence is the biggest since the early 2000s and the sharemarket tends to follow business confidence eventually.

But with central banks now perceived as being in a “race to the bottom” on interest rates, the prospect of zero or negative yields for a large part of the world’s debt market will continue to force investors to pay up for bond-like investments in the sharemarket.

Indeed there’s been a proliferation of dividend-focused equity funds as active managers struggle to meet the demand.

Plato Investment Management is raising $200m via an entitlement offer on its Plato Income Maximiser LIC.

“With cash rates and bond yields plumbing to record lows, investors are increasingly looking for dividend payments as a replacement for their cash and fixed interest income,” the fund’s managing director Don Hamson said.

The offer will provide Plato with a larger market capitalisation of about $530m, which is expected to attract greater research coverage and provide more liquidity, a more diverse shareholder base and a lower management expense ratio.

Mr Hamson said it was hard for retirees to live off the income from cash and fixed income.

“Retirees are struggling to make ends meet and should reconsider their income sources to look at active dividend investing,” he said. “Given the recent election result, retirees can continue to bank on receiving franking credits from Australian share investments and should consider taking advantage of the higher income on offer from them.”

The Plato LIC aims to continue paying regular dividends.

It paid monthly 0.5c fully-franked dividends in the year to June, equating to a yield of 5.5 per cent or 7.8 per cent including franking credits on the offer price of $1.10. With the special dividend of 3c, the yield was 8.2 per cent or 11.7 per cent with franking.

Written by Duncan Hughes

Originally Published in The Australian