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APRA’s announcement on Wednesday that banks should take a “measured approach to capital distributions” clears the way for Commonwealth Bank, ANZ and Westpac to pay a dividend this company reporting season. This is the time when companies report their half year or full year profits, announce any dividend payment, and provide an update on current trading conditions.
The sudden and deep impact of COVID-19 on economic activity has meant that there has never been a company reporting season shrouded in so much uncertainty. Over the last few months, companies have abandoned earnings guidance, raised capital, strengthened balance sheets, cut discretionary costs and foregone revenue in response to the pandemic. In some cases it was a matter of survival, for others it was to support their customers. For the stockbroker analysts however, it has made the forecasting of profit outcomes exceedingly difficult.
One of the biggest uncertainties has been around dividend payments.
The bank and insurance regulator APRA dropped a bombshell on the market in April when it ordered financial institution Boards to “seriously consider deferring decisions on dividends”. This led to ANZ, BOQ and Westpac immediately deferring their half year dividends, while NAB slashed its interim dividend from an expected 80c to just 30c per share. Macquarie cut its interim dividend in May, and last week, insurance giant IAG announced that it would not pay a final dividend.
Commonwealth Bank, which reports on Wednesday 12 August, is next cab off the rank. APRA has confirmed that banks in 2020 can now pay up to 50% of earnings as dividends, provided regular stress testing is conducted to guide decision making. Typically, CBA has targeted a payout ratio of between 70% and 80% of earnings, although the payout ratio topped 88% in FY19 and for the first half of FY20 was 79%. Based on an expected full year profit of $7.75bn (second half $3.0bn), shareholders can now expect a final dividend of around 80c per share.
ANZ is set to deliver a third quarter trading update on 19 August and has committed to advising the market on the status of its deferred dividend. Assuming that there hasn’t been a marked deterioration in its loan book, shareholders could expect a dividend of around 30c to 40c per share. The Westpac Board has only committed to “review dividend options over the course of the year” (no firm date) and has scheduled its third quarter trading update for 18 August. Given that its fine for money laundering breaches hasn’t yet been agreed (it has provisioned for $900m, apparently AUSTRAC is asking for up to $1.5bn) it may be somewhat more reluctant to dispense the goodies back to shareholders.
Outside banks, there will be keen interest in the Telstra dividend. Currently 8c per share, it comprises two components – a special dividend (first half 3c) representing the receipt of ‘one-off’ NBN payments as traditional telephone services are switched off, and an ordinary dividend (first half 5c). The latter represented a payout ratio of 83% of underlying earnings in the first half.
While Telstra’s earnings have taken a hit with the pandemic, particularly with small business customers where Telstra has been proactive in providing support, most analysts expect that Telstra will just manage to maintain the dividend at 8c. Into FY21 as the NBN payment starts to reduce, dividend maintenance will require Telstra to grow profitability.
Industrial companies will in the main be cautious, with those that raised capital during the pandemic shedding any thoughts of paying a dividend. This also applies to companies that saw their turnover crumble, including those involved in travel, transport, specialty retailing, gambling and education. Property trusts, particularly in the retail and the commercial office sector, will be under pressure to cut distributions as commercial rents fall and building valuations are slashed.
One bright spot will be the supermarket chains and homewares/electronic retailers. Dividends will at least be maintained for Woolworths, Coles, Wesfarmers, JB Hi-Fi and Harvey Norman, and in some cases such as JB Hi-Fi, are likely to see a modest increase.
Another high spot will be the dividends from our major miners: BHP, Rio and Fortescue.
Owing to the problems, competitor Vale is having in Brazil, they are raking in the dollars as the price of iron ore surges. Rio set the tone yesterday, announcing an interim dividend of 155 US cents per share, up 3% on FY19. Due to the recent rise in the Australian dollar, this will translate to a small decrease for Australian shareholders from A$2.19 to A$2.17 per share.
And while the old adage “never buy a resources company for dividends” still rings true, shareholders will be welcoming the good tidings from the major miners. Their largesse will offset what is otherwise shaping up to be a pretty gloomy season for investors depending on share dividends. The only saving grace is that with APRA’s decision, it is not as bad as it was looking a couple of days’ back.