Dividends in doubt, warns AFIC

Yield-hungry investors will have to contend with a “horrific” year for dividends, says AFIC’s Mark Freeman.

Mark Freeman is the managing director of Australian Foundation Investment Company (AFCI). Picture: Aaron Francis/The Australian

The rapid sharemarket recovery has set a high bar for listed companies heading into earnings season, while yield-hungry investors will have to contend with a “horrific” year for dividends, according to Australian Foundation Investment Company managing director Mark Freeman.

Speaking to The Australian after handing down a 41 per cent plunge in full-year net profit for the nation’s largest listed investment company, Mr Freeman warned boards would be forced to slash or even scrap dividend payouts in the coming weeks.

“I think there’ll be pressure (on dividends), definitely. I wouldn’t be surprised if boards take a conservative approach, let’s put it that way,” he said.

“Those sectors that are under pressure, it’s probably going to be a swift decision: don’t pay a dividend.”

 

Of the big four banks, CBA is the only one handing down its results in August. Days after APRA chairman Wayne Byres signalled the prudential regulator may imminently ease the tight clamps on bank dividends in place due to the coronavirus crisis, Mr Freeman said he thought CBA may announce a dividend on August 12, albeit a smaller one than last year.

“There’s a lot of retirees relying on that income from bank dividends. You could tell banks never to pay a dividend and their capital would go through the roof but they’d just be uninvestable,” he said of APRA’s guidance earlier this year that prompted major lenders to defer billions in dividend payments.

“There has to be an acknowledgment at some point, you’ve got to say well the banks are OK and they can pay dividends because for shareholders this is their income.”

Banks currently make up 17 per cent of AFIC’s overall portfolio and it is not putting new money into the sector, instead favouring growth plays or Telstra and Macquarie Group for income.

The LIC posted a net profit of $240m for the 12 months through to June, down from $406m in the previous year, as it suffered an income hit in part due to several companies slashing or deferring their dividends in the second half due to the coronavirus crisis.

The 2019 result was also boosted by one-off income items, including the Coles demerger and Rio and BHP buybacks, that weren’t repeated this year, it said.

Despite the income hit, AFIC kept its final dividend steady at 14c per share, which will be funded by drawing on reserves.

The last time the company was forced to dip into its reserves for a payout was during the global financial crisis.

“We’ve got enough to top it up for a couple years if we choose to. And we take each year as it comes, but at the moment we felt we were seeing those franking credits and reserves, and now’s the time you actually give that back to shareholders.

“We’ll just have to wait and see how the next couple of years go,” he said.

“This year is going to be horrific. Based on our forecasts, if we wanted to maintain the dividend this year — and that’s obviously going to be a board decision — we’d have to again draw on the reserves.”

The $7bn listed investment company took advantage of the sharp correction in March to improve the quality of the portfolio, he said, but following the market’s swift recovery he was no longer buying and was instead waiting for opportunities.

But the flood of money hitting the market as investors hunt for yield makes it more difficult, he admitted.

“To buy more ResMed of NEXTDC or Xero, those prices are being pushed out really high. So it’s hard; we’ll hold on to what we’ve got but to put new money in is a challenge. We’ve got to put new money is a challenge.

“So we just have to wait and perhaps we’ll have to look at other things. Maybe at some point it will be a Sydney Airport.”

AFIC’s portfolio returned -3.1 per cent for the year, including franking, compared to the benchmark ASX 200, plus franking, which returned -6.6 per cent.

CSL, Wesfarmers, Fisher & Paykel Healthcare and ResMed were among its top performers, while the major banks, Oil Search and Woodside Petroleum underperformed.

Major sales during the year included the complete disposal of holdings in Treasury Wine Estates, Suncorp, Scentre, Adelaide Brighton and Perpetual, while purchases included placements in NAB, Cochlear, Oil Search, NEXTDC, Ramsay Health Care, Reece and Sydney Airport.

The number of holdings in the portfolio reduced from 76 to 61 but it added three new companies in that time: Altium, Netwealth and Ryman Healthcare.

AFIC shares closed up 0.65 per cent at $6.18.