The ASX has been viewed as a stable source of income, given the context above do you believe this is changing?
Ever since the introduction of the dividend imputation system, Australian companies have recognised that shareholders value franking credits. Hence, Australian companies generally pay higher dividends as a form of capital management compared to overseas counterparts that may horde cash or return capital to shareholders via buy-back programs. Given the dividend imputation system is a permanent feature of the Australian financial landscape, on average, ASX-listed companies should continue to deliver a stable source of income from dividends.
Of course, some companies may cut their dividend. In recent years, we have witnessed quite a few large companies (such as BHP, ANZ and Telstra) cutting their dividend. The dividend cuts are very much due to stock-specific reasons as opposed to what is happening in the broader financial landscape.
Do you expect the breakdown of top dividend payers in the Australian market to change dramatically in the years ahead?
In 2016, BHP aggressively cut its dividend by 75% when its balance sheet was under stress with collapsing commodity prices. To ensure the balance was protected going forward, BHP changed its dividend policy from historically being progressive to a target payout ratio. Hence, in the future, its dividend will vary based on movements in commodity prices.
In 2017, Telstra cut its dividend by 30% to 22 cents per share. Its historic dividend was highly unsustainable because of the substantial earnings hole post the NBN migration and they historically had a dividend payout ratio of 100%.
Over the last few years, the banks were operating in a different market environment versus BHP and Telstra. With greater regulatory requirements to hold more capital on balance sheet, the banks walked a fine line between paying out dividends and retaining earnings to build up their capital base. Out of the big four banks, ANZ had to cut its dividend in 2016 because it had the weakest capital position at that time. Barring a recession, the big four banks’ dividends are sustainable given all four have a clear path to reaching APRA’s target common equity tier 1 capital ratios of at least 10.5% by 2020.
As featured in Livewire