Will dividends increase in 2020?
2019 was a bonanza for dividends, mainly due to Bill Shorten’s proposal to stop the refunding in cash of surplus franking credits. Ahead of the May election, companies declared special dividends, supersized their ordinary dividends or brought forward the payment of dividends from the 19/20 financial year to the 18/19 financial year. Some implemented off-market share buybacks, which involve the payment of a turbo-charged franked dividend.
This year is going to be more challenging because it is very unlikely we will see many special dividends or off-market share buybacks. There are also two other important factors at play. Firstly, profit growth for the market as a whole is low single digit – much less than the price appreciation of the stock market, notwithstanding the coronavirus scare. This means that it is harder for companies to maintain the same effective dividend yield. The other factor relates to pressure from institutional investors, economists and analysts for companies to adopt “sustainable” dividend payout ratios.
In an environment of ultra-low interest rates, investors are increasingly dependent on share dividends for income, so changes to payout ratios or other influences are of concern. Questions by investors such as “what will happen to my dividends in 2020?” and “what increase, if any, can I expect?” abound.
Obviously, answers to these questions depend on the composition of the portfolio, so to help, let’s look at data from the just wrapped-up company earnings season and dividend projections on a sector-by-sector and stock-by-stock basis.
The February company earnings season is the time when about 75% of all companies provide detailed half-year or full-year financial reports. According to AMP Capital who monitor individual company results, it was a season of “mixed“ outcomes.
While 53% of companies saw their profits rise from a year ago, this was down on the long-term norm of 65% of all companies. The number surprising on the upside (“beats”) was 38%, the same as the number of “misses” but down on the long-term average of “beats” of 44%. Overall, expectations for earnings growth in 19/20 came in at a weak 2.3%.
On the dividend front, 50% of companies increased their dividend (down from the long- term norm of 62%), while 22% reduced their dividend and 28% were unchanged. Big increases were recorded by the major miners on the back of the increase in the iron ore price, but this trend is unlikely to continue. Dividend increases were small reflecting a focus by companies on the sustainability of dividend payout ratios.
To quantify the increase in dividends, let’s consider the outlook for each sector and on a stock-by-stock basis. Detailed below are the 11 industry sectors and the major stocks that make up each sector. The sectors are arranged in descending order of market weight. For example, financials, with a weight in the S&P/ASX 200 of 29.7% is first, utilities with a weight of 1.9% is last.
1. Financials
Dividend trend: Down. Some pressure on banks to cut dividends
Stocks:
- CBA No change to interim. Expected unchanged 431c for full year
- ANZ Expect unchanged 160c dividend for full year
- NAB Expect unchanged 160c for full year
- WBC Likely to be cut to 160c for full year (down from 174c)
- SUN Interim unchanged at 26c. Final likely to be cut
- BEN Interim div cut from 35c to 31c
- BOQ Final div cut from 38c to 31c
- MQG Interim up to $2.50 from $2.15. Final could be reduced
- QBE Final down 1c to 27c. Expect higher for 2020 year
- IAG Interim cut from 12c to 10c
- MPL Interim unchanged at 5.7c
2. Materials
Dividend trend: Higher now, but expect cuts in second half 2020 and into 2021
Stocks:
- BHP Interim div up 18% to US65c (A$0.97)
- RIO Final div up 28% to US$2.31 (A$3.50)
- FMG Interim up from 60c to 76c
- AMC Dividends now quarterly, largely unchanged
- NCM Interim unchanged at US7.5c
3. Healthcare
Dividend trend: Higher
Stocks:
- CSL Interim dividend up 12% from US85c to US95c
- RHC Interim dividend up from 60c to 62.5c
- RMD Dividends quarterly, increasing gradually
- SHL Interim dividend up 3% from 33c to 34c
4. Industrials
Dividend trend: Marginally higher
- BXB Interim dividend unchanged at US9c
- TCL FY20 distribution expected to be 62c, up from 59c
- SYD Up 4% in CY19. CY20 likely to be flat to very small increase
- AZJ Interim up from 11.4c to 13.7c
- CIM Interim up 1c to 71c
- SEK Interim cut from 24c to 13c
5. Real Estate
Dividend trend: Higher, low to mid single digit increase
- GMG Guided to unchanged FY20 distribution
- SCG Guided to 3% distribution increase for CY20
- DXS Guided to 5.5% distribution increase for FY20
- MGR Guided to 5% distribution increase for FY20
- SGP Guided to unchanged FY20 distribution
6. Consumer Discretionary
Dividend trend: Marginally higher
- WES Up 5c to 105c in total when Coles included
- ALL Brokers expect 65c for FY20 , up 16% on FY19
- TAH Interim unchanged at 11c
- CWN Interim unchanged at 30c
- HVN Interim unchanged at 12c
7. Consumer Staples
Dividend trend: Marginally higher
- WOW Interim div up 2c from 45c to 47c
- COL Maiden interim div of 30c. See WES above
- A2M No dividend
- CCL Final dividend unchanged at 26c
- TWE Interim up 2c to 20c, but has withdrawn FY20 profit guidance
8. Energy
Dividend trend: Flat to down
- WPL FY19 dividend US91c, down 37% from US144c in FY18
- STO FY19 dividend US11c, up 13% from US9.7c in FY18
- ORG Interim dividend up from 10c to 15c
- OSH FY19 dividend US10.5c, down 10% from US9.5c in FY18
9. Communication Services
Dividend trend: Flat, with risk for Telstra from FY22
Stocks:
- TLS FY20 div expected to be unchanged at 16c. Possible cut in FY22
- REA Interim unchanged at 55c
10. Information Technology
Dividend trend: Very few companies pay dividends.
Stocks:
- CPU Interim up from 21c to 23c
- LNK Interim down from 8c to 6.5c
11. Utilities
Dividend trend: Power utilities down, others up by around 5%
Stocks:
- AGL Interim down 15% to 47c (from 55c)
- APA Guided to FY20 distribution of 50c, up 6%
- AST Interim 5.1c, up from 4.9c
Healthcare, real estate, consumer staples and consumer discretionary sectors are set to pay higher dividends in 2020, while the biggest sector, financials, and energy, are down. The other sectors are flat. Dividends from the large resource companies are higher in the first half of 2020, but are likely to be cut in the second half.
In summary, dividends in aggregate for 2020 should increase over 2019 at around 3% to 5%. This assumes that the impact of the coronavirus scare on economic activity (and any flow-on to company earnings) is relatively contained. Looking ahead to 2021, where the impact of lower commodity prices will be felt, the outlook is less rosy and starts with a flat base.