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Mark LaMonica | Morningstar
In a recent article I assessed the feasibility of retiring off the income generated by a share portfolio. Based on the feedback that I received from readers I’ve explored the heavily concentrated Aussie market where around 60% of the income generated by the 200 companies within the ASX 200 come from 10 shares.
The prospects for income investors who hold the ASX 200 and the individual companies that generate much of the index income are based on the future dividend payments from these companies. For the countless retirees who wrote me with stories of how their retirements are funded by dividend payments this exercise is far from theoretical and will impact their day-to-day lifestyle.
Our analysts project future dividends for each company they cover. Those estimates provide the opportunity to explore the estimated forward dividends for the ten biggest contributors to income generated from the ASX 200. In part one I explored the first five names on the list: BHP (ASX: BHP), CBA (ASX: CBA), Rio Tinto (ASX: RIO), National Australian Bank (ASX: NAB) and Woodside (ASX: WDS). This article will explore the remaining companies.
The following chart shows the dividends over the last two financial years and the projection of dividends for the next two financial years by our analysts. This is followed by commentary on the 5 members of the list that I did not cover last week.
Fortescue benefited substantially from the surge in Iron Ore prices after COVID which led to a hefty dividend in fiscal 2021 of $3.58. Lately the dividend picture has been less positive.
Fortescue will pay a fiscal 2023 dividend of $1.75 a share which is fully franked. This was 6% below Morningstar analyst Jon Mills’ estimate but met the middle of Fortescue’s 50%-80% target payout ratio.
Going forward Mills expects conditions for Fortescue to continue to be less favourable which will led to continued reductions in the dividend. The company has a large exposure to China’s troubled real estate sector, given that almost all of its iron ore is sold to customers in China.
For fiscal 2024 Mills expects the dividend to drop to $1.67 and further reduce to $1.33 in fiscal 2025. However, if iron ore prices rise it could be good news for income investors. Mills notes that Fortescue is increasingly focused on the dividends and a focus on debt reduction and cost reductions have resulted in a sound balance sheet.
The outlook for ANZ’s dividend is more positive. The bank is in sound capital position with $3.5 billion in surplus capital which is at the top end of ANZ’s target range. Morningstar analyst Nathan Zaia expects average earnings per share growth of 4.5% a year until 2027 which will support continued growth in the dividend assuming a payout ratio of around 65%.
CEO Shayne Elliot took the helm in 2016 and changed strategy, simplified the bank, and revamped senior management. The focus on retail, commercial, and institutional banking is expected to improve earnings over the long term with less emphasis on the "super regional" Asia strategy.
Zaia believes that fundamentally ANZ Group remains in good shape and in the long term, we expect will produce solid profit growth broadly in line with growth in the economy.
When it comes to shareholder distributions, Zaia thinks ANZ Group has set an appropriate dividend payout range considering the capital position, outlook for loan growth, M&A opportunities, and loan-loss provisions.
Westpac is in a similar position to other members of the big 4 banks although investors remain unconvinced the bank can grow revenue in line with peers and simultaneously achieve operating cost savings, in addition to navigating industrywide concerns for loan losses. Morningstar analyst Nathan Zaia has a more positive view.
Similar to NAB, Westpac used COVID as an opportunity to reset shareholder expectations and dial back a dividend payout ratio that Zaia described as aggressive.
Westpac paid out too much of earnings and subsequently required equity raisings. The bank continued to maintain a dividend in dollar terms, while the payout ratio rose to an unmaintainable 90%. Management and the board aimed to look through “one-off” costs. The problem was that one-offs kept coming. In the last five years Westpac’s shares on issue increased around 10%.
Macquarie’s dividend track record is impressive with steady growth in the dividend with the exception of 2020. Morningstar analyst Nathan Zaia expects this trend to continue with fiscal 2024 dividends of $7.70 per share and fiscal 2025 dividends of $8.00.
Macquarie has typically paid out around 70% of earnings as dividends, within the companies the annual dividend payout ratio. In fiscal 2020 and 2021 the dividend payout ratio was around 55%, with management showing a willingness to lower the dividend to preserve capital when uncertainty is high, and ensure the group can capitalise on opportunistic investments. Zaia believes this is the right thing to do as it reduces the likelihood of a dilutive equity raising. Something both NAB and Westpac failed to do.
Morningstar analyst Johannes Faul expects a fiscal 2024 dividend of $1.91 a share which matches 2023. Faul is forecasting growth in the dividend to $2.04 a share in fiscal 2025.
Wesfarmers possesses many positive attributes of a strong dividend payer. Faul has awarded Wesfarmers an Exemplary capital allocation rating. The balance sheet is in a strong position, investments have a track record of generating significant economic profits for shareholders and distributions to shareholders are at appropriate levels.
Faul believes distributions to shareholders have largely been appropriate with Wesfarmers consistently paying a high percentage of underlying earnings to shareholders and returning excess capital through special dividends.
He also believes the company is in good shape if the economy heads south. The entrenched nature of Wesfarmers’ retail key brands, diverse portfolio, and strength of the balance sheet means the conglomerate is in a strong position to weather a prolonged downturn in the broader economy with relatively little potential for financial difficulties.
First published on the Firstlinks Newsletter. A free subscription for nabtrade clients is available here.
Mark LaMonica is Director of Product Management, Individual Investor, Morningstar Australia. All prices and analysis at 20 September 2023. This document was originally published in Morningstar on 23 September 2023. This information has been prepared by Morningstar Australasia (AFSL 240892).
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