Aussie companies deliver on dividend growth

Published in the ASX Newsletter, March 2014 by Melanie Timbrell

With interest rates near all-time lows, the appeal of dividend paying stocks has soared among Australian investors.

But while earnings growth dominated talk in the recent reporting season, which companies and sectors have surprised on the dividend front?

Australian companies are increasing dividends to shareholders at the fastest rate in the developed world, according to data compiled by Bloomberg last week.

The recent February reporting season saw more than 130 companies from the ASX 200 index deliver half year results for the six-months to the end of December.

“In aggregate, revenue grew by 4.8% to $323.1bn while expenses grew by 2.1% to $255.7bn, leading to a 19% lift in net profit to $36.5 billion,” said CommSec's chief economist Craig James, who analysed 138 of those companies.

“Cash holdings soared by 35% to $87.3 billion (around 2.4 times current profits) with a number of companies using some of the proceeds to lift dividends.”

Interim dividends themselves rose 7.2%, according to James.

However, Commonwealth Bank equities analysts highlighted the role that cost cuts played in profit growth, and said that on the whole dividends had not surprised as much as earnings had.

This was in part attributed to a lower than expected dividend payout ratio. This is the portion of net income that a company distributes to shareholders as dividends.

Expectations aside however, the dividend payout ratio for Australian companies is now near record highs.

According to the analyst report, this means “dividends are unlikely to grow ahead of earnings. Of course, if earnings growth finally comes through, this would boost capacity to lift dividends”.

Australian dividend growth

Ever since the introduction of franking credits, Australians have been partial to including dividend-paying stocks in their portfolios.

The popularity of these so-called ‘income’ stocks, however, can vary depending on where we are in the economic cycle.

In the past year for instance the phrase “hunt for yield” has often been used in financial headlines.

This is because as term deposit rates fall, stocks that pay regular, high dividends start to look more attractive to investors as substitutes for the income they used to be able to collect from a term deposit or similar high yielding account, albeit with higher risk attached.

Looking to shares for income

Chief investment analyst at Wealth Within, Dale Gillham says that looking to dividend paying stocks for income is generally an Australian phenomenon that has developed in part because of the structure of our market where a small number of very large companies dominate the index.

“Dividend yield and dividend payments themselves are heavily promoted in Australia as a way of keeping shareholders happy,” said Gillham.

This contrasts with other developed markets where investors tend to be more comfortable looking at other asset types, such as fixed interest for the income component of their portfolio, rather than trying to get that from shares, Gillham says.

“Relying on dividends also comes in part from the buy-and-hold mentality, as it gives a return on a regular basis even if you are not realising your capital growth by selling as the value of your shares rises,” Gillham says.

“With shares though, it is important to think about your capital growth as well. 

You are not going to make money if the value of your stocks is going down even if you are getting a regular dividend. You need to think about your actual wealth position.”

Companies and sectors paying a high dividend

While in the lead-up to reporting season analysts said that they were looking for earnings growth from companies, there were some positive surprises on the dividend front for investors as a consequence of higher levels of cash.

According to Commonwealth Bank equities analysts, these companies included JamesHardie (JHX), which declared a special dividend of US$0.28 per share, Arrium (ARI), Beach Energy (BPT), and Fortescue Metals Group (FMG), which declared an interim dividend of $0.10 per share having paid no dividend for the same period last year.

“Steel, Energy, Media and Insurance stocks have lifted dividends solidly on pcp [prior corresponding period]. 

In contrast, Contractors, Gaming and Food & Beverages have seen dividends go backwards over the same period,” the analyst report said.

Gillham says that generally speaking investors wanting dividends will look to larger established companies with stable dividends that don’t spike either up or down.

That said, he points to a number of companies which have delivered a bonus to investors with special dividends or significant dividend growth over the past year.

Woodside Petroleum (WPL) paid US$2.49 per share in dividends in 2013, representing more than 100% growth in dividend yield, with a special dividend of US$0.63 per share boosting the distribution. 

Gillham says the company has had a “very quiet year on the capital expenditure front”, with the resulting cash being used to both shore up its balance sheet and grow its dividend.

Gillham also mentioned insurers among those companies which had displayed recent dividend growth. 

“IAG is leading the large cap insurance providers with a 6.60% [yield], fully franked dividend.

This represents growth of more than 100% in the last 12 months," Gillham said, adding that the company has had a “bumper year financially and therefore is rewarding shareholders”.

Suncorp's (SUN) half year dividend also bumped up 40% in the recent reporting season despite net profit being 5% down on the previous year, with Gillham saying that the company has “worked hard on its balance sheet including adding an extra $1.2 billion to its capital position”.

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