Better news for income investors with dividend drops unlikely to linger

Australian dividends plunged close to 50 per cent in the September quarter but the worst may soon be over for income investors.

Dividend payouts tumbled close to 50 per cent in the September quarter. Picture: NCA NewsWire/Joel Carrett

Australian dividends plunged close to 50 per cent in the September quarter, largely due to the banks slashing their payouts, but the worst may soon be over for income investors, according to asset manager Janus Henderson.

Dividends in Australia for the third quarter of the calendar year came in at just $US9.6bn ($13.4bn), down 47.8 per cent on the prior year. It was the lowest total for a September quarter in at least 11 years, Janus Henderson said.

The sharp decline was led by the major banks, with CBA, NAB and ANZ between them accounting for three-fifths of the $US8.8bn fall in Australian dividends in the quarter, the asset manager found in its latest global dividend index.

Westpac paid its 2019 interim dividend in the June quarter of that year and did not pay an interim dividend this year.

Last year, the banks accounted for half the dividends in the Australian part of the index, Janus Henderson said. With lenders this year shackled by the prudential regulator’s decree to dish out no more than 50 per cent of their earnings in dividends, they had no choice but to slash payouts.

Other casualties in the local market included insurer IAG, which cancelled its dividend for the first time on record in order to bolster its capital reserves, as well as Sydney Airport and Aristocrat Leisure, both of which have been hard hit by shutdowns this year.

Coles and gold miner Newcrest, which have both been beneficiaries of the crisis, were the only two Australian companies in the index to raise their dividends year-on-year.

Janus Henderson investment director for global equity income, Jane Shoemake, said Australia was among the countries that had proved more vulnerable, in part because payout ratios were already too high. “A reset was overdue for some key companies. They now have a firmer basis for future growth,” she said.

Income investors in the UK and the Netherlands were also hard hit in the quarter. In the UK, payouts tumbled 47 per cent, while in the Netherlands they dropped 41 per cent. In contrast, China, Hong Kong and Canada were among the few major countries to record higher dividends over the three-month period.

The September quarter is China’s big dividend season and payouts there were 3.3 per cent higher year-on-year. Three quarters of Chinese companies raised payouts or held them steady.

US companies, meanwhile, delivered just a 3.9 per cent decline in payouts over the quarter, with 80 per cent either holding or lifting their payouts in the period.

Globally, dividends in the three months through September plunged by $US55bn, or 14 per cent, to $US329.8bn, their lowest level since 2016.

The asset manager’s best-case scenario is that global dividends will tumble 15.7 per cent in 2020. In its worst-case scenario, dividends around the globe will plunge 18.5 per cent over the year. But even in its best case, more than three years of dividend growth would be wiped out over the year and would cost investors $US224bn in lost income.

Matt Gaden, head of Australia at Janus Henderson expects local payouts to still be declining through the first three months of calendar 2021, before a pick-up in the second quarter.

“As a rough guide, we estimate a worst case for dividends to be flat next year on an underlying basis, but we believe they could rebound by 12 per cent in our best-case scenario,” Mr Gaden said.

“The big question mark is over the decisions the regulators in the UK, Europe and Australia will make around banking payouts.”

The banking regulator, APRA, recently suggested it may lift the cap on bank dividend payouts as the economic outlook improves.