ASX companies ready for $71bn dividend bonanza

Australian companies are set to shower investors in cash this year, with dividend payments heading back towards 2019’s record levels.

Picture: Bloomberg

Australian companies are set to pay almost $70.9 billion in dividends this financial year, nearing their pre-pandemic peak in 2019, as boards elect to return profits to investors over business investment.

A global index that tracks dividends around the world found dividends of Australian businesses are set to reach 85 per cent of 2019 payout levels on the back of a strong recovery in the domestic economy.

The Janus Henderson Global Dividend Index findings show Australian companies are among the world’s most generous when it comes to dividend payments.

The big payouts come in the wake of many businesses hitting pause on capital expenditure, cancelling spending in 2020 amid the turmoil of the Covid-19 pandemic.

Payouts by Australian companies are set to grow by 40 per cent this year, Janus Henderson found, but acknowledged continued uncertainty could crimp any potential recovery of returns to shareholders in the near future.

More widely, Janus Henderson – which ranks as one of the worlds biggest fund managers – upgraded its 2021 global dividend forecast to $US1.78 trillion, an increase of 8.4 per cent.

The report found miners and banks made up the bulk of the 10 top dividend payers in Australia, contributing almost 78 per cent of Australia’s total dividend haul.

But Janus Henderson said the Australian market composition was comparable with emerging markets, and failed to reflect the country’s advanced and complex economy.

Janus Henderson said the concentration of dividend payers was apparent in 2020, when dividends fell 40 per cent.

BHP has typically been Australia’s top dividend payer, distributing $US14.05 billion in 2019. However the current 2020 rankings place Fortescue Metals at the top of the table, after it paid out more than $7.4 billion last year.

The index found mining has powered dividend growth in 2021 driven by a 60 per cent growth in commodity prices.

Janus Henderson said it also expected a healthy increase of dividend payments from defensive retailers like Coles and Woolworths.

But the funds manager noted many other companies would find it hard to grow dividends and some may pay nothing.

Janus Henderson Investors client portfolio manager Jane Shoemake said the group expected fewer downside risks now than at the start of the year.

“Australia’s concentration in a small number of dividend payers is likely to prove a tailwind in the recovery, as the local economy gets back on track and banks look to normalise their dividend payments, albeit at lower levels than prior to the pandemic,” she said.

“Australian investors should consider diversifying their income investments beyond the top ten local dividend payers and seek income from beyond their own shores.”

Matt Gaden Head of Australia at Janus Henderson said the outlook was positive but market concentration around banks and mining stocks risked dividend droughts from other parts.

“The dividend bounce back should be a big relief to Australian investors, particularly self-funded retirees,” he said.

The big boosts to payments may come as unwelcome to Australia’s treasurer Josh Frydenberg, who in 2019 called for business to dial back payouts to plough the money into investing for the future.

The Treasurer scolded businesses in 2019 for paying out big dividends and making major share buybacks.

“If we are going to create new jobs and enable people to earn more for what they do, we need businesses to increase their capital expenditure and to adopt new technologies and business practices that effectively integrates capital with labour,” he said at the time

“Share buybacks and capital returns are becoming increasingly prominent and the default option for corporates. But is a buyback ­always the best option for the future growth of the company and therefore the economy?”

Treasurer Josh Frydenberg. Picture: NCA NewsWire / James Gourley

RBC Capital Markets chief economist Su-Lin Ong said business investment was critical for a stronger and sustainable economic recovery.

“It’s not possible to get a much needed lift for productivity if you don’t have a strong business investment,” she said.

But she said it was unlikely businesses were heeding the treasurers 2019 call to tone down dividends and plough funds into investment.

At the end of the day businesses make (dividend payout) decisions based on the needs of their company,” she said

“The factors that influence that are the lower rates, the sustainability of demand, and growth prospectus.”

IFM Investors chief economist Alex Joiner said hefty dividend payouts did go some way to buoying economic activity and supporting saving for many Australians.

“Companies are an important source of income in an environment where interest rates are so low,” he said.

“Where can you find a stable income? You’re risking your capital with investment in equities, but it has been traditionally a way to generate an income, It is a source of income and companies are wary of taking that away.”

Dr Joiner said it was worth remembering that some key sources of dividend payouts came from businesses that didn’t need to make significant capital expenditure to boost returns

“You’ve got to look at some of the companies that pay dividends, banks are important amongst those, maybe banks don’t need to invest as much,” he said.

“Banking hasn’t changed a lot in the last decade.”

Workers on the production line building new Cochlear Implants at Cochlear, Sydney. Picture: NCA NewsWire / James Gourley

Dr Joiner said capital expenditure data due out on Thursday would be a good indication of the degree to which businesses have spent windfall profits on investment.

“If there’s an absence of a rebound that’ll have policymakers scratching their heads about what they can do,” he said.

Dr Joiner said despite the good short term economic outlook it was clear businesses weren’t rushing to invest despite all the opportunities available.

“Businesses aren’t short of capital if they need it for the most part and they haven’t wanted it,” he said.

“We still don’t know what the outlook is going to be, there’s uncertainty about the economy and our way out of this public health crisis.”