Better-than-expected dividend payouts defy predictions of downturn

Signs of better-than-expected dividend payouts in the August reporting season are consistent with growing hopes of a ‘soft landing’, notwithstanding concern about China.

Early signs of better-than-expected dividend payouts in the August reporting season are consistent with growing hopes of a “soft landing” in the global economy, despite lingering concern about a slowdown in China.

Even as the domestic economy shows increasing signs of cooling demand after the fastest increase in interest rates in more than three decades, a number of companies – including AMP, Commonwealth Bank, Bendigo and Adelaide Bank, Carsales and JB Hi-Fi – have beaten expectations for dividends per share.

The dividends come after the Reserve Bank halted its interest rate increases in July and August and projected a soft landing for the economy as inflation continues to fall towards its target band of 2-3 per cent.

The RBA’s first two-month pause in rate rises since it started lifting the cash rate from a record low of 0.1 per cent in May last year came as its latest economic forecasts this month projected that the economy would avoid a recession in coming years. Growth was expected to accelerate from a low point in the year to December and inflation was projected to return to its target in late 2025.

The S&P/ASX 200 fell 0.9 per cent to 7277 points on Monday, its lowest level in more than four weeks, after US producer price data rekindled inflation worries and China’s lending data disappointed investors.

MST senior analyst Hasan Tevfik. Picture: Julian Andrews

While it’s too early to know if the current reporting season will show a trend of companies beating dividend estimates, MST senior analyst Hasan Tevfik said he believed total dividends per share were likely to reach a positive “inflection point” in a “mid-cycle slowdown” in the December half year. “We’re forecasting a mid-cycle slowdown in earnings per share, and we’re expecting the consensus estimate for 12-month forward earnings per share to trough out in the current half year ending December,” Mr Tevfik said. “This should also mean we are near the lows in dividends per share.”

After viewing reports in the past two weeks from companies representing about 20 per cent of the top 200 companies by value, he said the consensus estimate for next 12-month dividends per share had crept up by 20 basis points, or $150m, to $92.8bn.

The upgrades have been concentrated in the commodities and financials sectors, while the industrials sector has endured small downgrades from analysts.

“For the companies which have reported we also see small upgrades to the dividend outlook, the biggest of which has been AMP, where analysts expect more of its $800m of excess capital will be returned to shareholders via dividends than previously thought,” Mr Tevfik said.

“Also, there were big upgrades for AUB Group’s dividend in line with its earnings per share upgrade and Commonwealth Bank, which saw a distribution of excess capital and a $1bn share buyback.”

He said the S&P/ASX 200 index was trading on a 12-month forward dividend yield of 4.2 per cent, which is a touch below the average of the Australian sharemarket since 1987, of 4.3 per cent.

Commonwealth Bank saw a distribution of excess capital and a $1bn share buyback. Picture NCA Newswire/ Gaye Gerard

The S&P/ASX 200 index was also trading on a 12-month forward price-to-earnings ratio of about 15.2 times, slightly above its long-term average of 15 times.

MST’s Mr Tevfik said corporate reporting for the first two weeks of August supported his expectation of a positive “inflection point” for aggregate ASX 200 profits in the December half year.

“The low point in Aussie profits is forecast to be in the current half and the results during the reporting period so far help confirm this,” he said. “The main drag on Aussie profits are from the commodity producers and EPS here is forecast to hit a low over the next 12 months,” Mr Tevfik added. “Positive EPS momentum should bode well for stock indices.”

Consensus estimates for EPS growth are flat for the year to June this year and up 2 per cent for the year to June 2024. Expectations for June 2024 profits have so far been downgraded by 0.7 per cent, or $1bn, to $149.5bn, in line with average change in reporting seasons.

But profit margins appear to be “under a little pressure” with slight net downward revision for both industrials and commodity producers. As with recent reporting periods, the margin pressure is coming from costs, particularly for commodity producers, while sales have been revised higher.

Ausbil Active Dividend Income fund portfolio manager ­Michael Price said while there was some evidence that growing hopes of a soft landing were helping dividend estimates, it had mainly been the case for CBA, AUB and to some extent JB Hi-Fi.

“It’s definitely true when it comes to the banks,” he said.

“CBA has ticked up its dividend payout ratio because they over-provisioned for bad debts during Covid based on expectations of a hard landing, and given that there’s no sign of that, they can give some of those provisions back to shareholders, if they’re not growing too rapidly.

“It ties in with the end of the off-market buybacks. The banks, when they had a bit of a capital release, would give you those off-market full-franked dividends, but now they can’t do that to get the excess capital back in the shareholder hands in the most tax-effective way. So they are ticking their payout ratios back up again.”