Shareholders Reap Benefits

Published in the Herald Sun, February 2014 by Karina Barrymore

Shareholders are back in the money — big time. Not only are company profits up in the current reporting season but dividends are up too.

Almost $30 billion is forecast to be handed out to shareholders in half-year dividends during the next few weeks — an increase of a whopping 13 per cent, or $3.5 billion, on the same time a year ago. The dividend “bonanza” is being paid out of hefty cash reserves that most companies have built up during the past few years of cost cutting.

A lack of merger activity has also kept company bank accounts full as board members have opted for caution rather than taking risks with acquisitions following the financial crisis. Now, however, it’s boom time for shareholders with rising share prices and rising dividend payouts.

Of the near $30 billion in dividend cash that will soon be released in to the economy, about 70 per cent will be paid to Australian-based shareholders, split 50:50 between institutions, such as fund managers, and individual investors.

This will not only help the local economy but also see further share price growth, as much of it will be reinvested back in to the share market, further pushing up prices and benefiting shareholders.

"Dividends are higher, it’s been a definite theme of this reporting season," AMP Capital head of investment strategy and chief economist Shane Oliver says.

"Companies are seeing the light at the end of the tunnel and paying out big time in terms of dividends. And investors want that income. There is nothing like a bird in the hand, which is what a good dividend is." Mr. Oliver says.

"It means they don’t just have to rely on capital growth. It also means they are earning a decent income return." 

Most of the 200 biggest companies in Australia have reported their results for the six months to December. Of these, 70 per cent have declared a higher dividend — well up on the same time a year ago when it was less than 60 per cent of companies.

Just as importantly, according to Dr Oliver, only 9 per cent have so far lowered their dividends, compared with more than 20 per cent a year ago. "It’s a good sign that says companies are back on track after a tough couple of years," he says.

Resource company shareholders seem to be doing the best with their dividends up about 25 per cent, while bank shareholders, who already enjoy large dividends, have seen a further increase of about 8 per cent in their payouts.

Across the wider market, the bulk of which is made up of companies classified as industrial, dividends are up about 13 per cent, Dr Oliver says. "Whichever way you cut it, the increase in dividends has been driven by the resource companies and to a lesser extent the banks but it’s a bit of a bonanza going on out there which translate to about $3 billion to $4 billion extra being paid out to shareholders."

According to Commsec economist Savanth Sebastian, the bigger dividends are a result of companies holding more cash than usual on their balance sheets. “From the results so far, companies are certainly cashed up. Total cash reserves jumped 45 per cent compared with this time last year,’’ Mr. Sebastian says. "Even when you take out BHP, Commonwealth Bank, Telstra and Wesfarmers, cash reserves still jumped 12 per cent."

The past six months have all been about cost cutting and battening the hatches which has allowed the cash to build up. Some businesses have been “sitting on their hands just getting through it”, Mr. Sebastian says.

"Businesses weren’t out there looking to invest, there has been no additional capacity put in these companies and no merger and acquisition activity, which has driven those cash reserve higher," he says. "The year also wasn’t as bad as what initially most chief executives thought it would be. So far sales are up 5 per cent, (with) profits up around 17 per cent."

However, with cash in the tank and a recovering economy, increased merger and acquisition activity is expected in the year ahead. Company boards will also be on the lookout for assets to buy so they can continue the trend of increased dividends. But investor demand is a driving factor.

Companies are increasingly realising in a post-GFC environment that investors are keen to receive an income as well get capital growth. Investors are again turning away from low-paying savings deposits and back to the share market, Mr. Sebastian says.

"Companies are realising yield is still a strong play given the low interest rates and low deposit rates," he says. "There is a fair degree of interest from investors in holding strong blue chip, high-yielding stocks." "For the first time in a decade, term deposits have fallen and akin to what the Reserve Bank has said, there is a shift out of cash in to riskier asset classes such as property and equities."

The strong dividends also look like they will continue, at least for the medium term. "If the economy continues to strengthen, it is likely companies will certainly be looking to increase those dividends for the full year."

However, David Thang, market strategist with fund manager Wealth Within, says investors should not chase dividends at the expense of all else. "Many investors are on the hunt for high dividend yielding companies, however, chasing yield is a recipe for disaster," he says. "Our objective is to identify stocks which have strong capital growth prospects. An attractive dividend yield is a bonus."