Boards wary about splashing dividend cash as growth slows

Corporate boards are taking a cautious stance on lifting dividends as businesses confront rising costs in an economy that is clearly weakening under the weight of steep increases in interest rates, earnings season results suggest.

Most ASX 200 firms that report profits over the June half have now delivered their results, and experts say a key theme has been for companies to issue soft guidance, prompting market analysts to downgrade their forecasts.

With the August reporting season on the ASX nearing an end, experts say company guidance has generally been soft.Credit: Louie Douvis

Profit results for the June half have not been as bad as feared, pointing to a degree of economic strength in the first six months of the year. But the decisions boards made on dividends suggest many have a cautious outlook for earnings, as the economy slows and rising costs bite.

AMP chief economist Shane Oliver said only 43 per cent of companies to report so far had raised dividends compared with a year ago, below the longer-term average of 58 per cent, “suggesting a degree of caution.”

“Normally if they are feeling optimistic, they raise their dividends,” Oliver said.

Macquarie strategist Matthew Brooks told clients that market forecasts for both earnings and dividends over the current 2024 financial were being downgraded. He said companies where analysts had made “material” cuts in their forecasts for 2024 dividends included BHP, South32, Santos, Woodside, WiseTech, Ramsay Health Care, Stockland and Nine Entertainment.

This earnings season has also sparked an unusually high number of big share price moves for companies that beat or missed market expectations, as investors grapple with economic uncertainty.

CommSec chief economist Craig James said dividend decisions came down to the financial position of each company, and so far, 90 per cent of ASX 200 companies tracked by CommSec had issued dividends, a higher proportion than the long-term average. That said, 25 per cent of companies had cut their dividend, compared with the long-run average of 18.5 per cent.

“There was a higher proportion of companies than normal that cut their dividend,” James said.

On CommSec’s numbers, companies that have reported full or half-year results have announced $32.3 billion in dividends to be paid this year, down from $40.4 billion last year. A key reason for this fall was the deep cuts in dividends from mining giants BHP and Rio Tinto, because of falling commodity prices and a worrying slowdown in China.

UBS strategist Richard Schellbach highlighted the challenge posed by rising expenses, which businesses have felt through higher bills for wages, rent, energy, technology and transportation. “The most prevalent headache for companies this profits season has been on cost management,” Schellbach said.

Despite this pressure, Schellbach said companies were generally protecting their profit margins by passing on these higher expenses to customers, highlighting the price rises in insurance and telecommunications.

Schellbach also said there had been an unusual number of share price moves of 10 per cent or more on the day of earnings results, which he said was influenced by the “highly unpredictable economic cycle.”

Companies that suffered big share price falls on the day of their results included supermarket giant Coles, which tumbled 7.1 per cent; WiseTech, which plummeted 20 per cent; and Judo Bank, which plunged almost 20 per cent.

In contrast, shares that enjoyed big gains on the day of their results included Boral, which jumped 8.5 per cent; fund manager Magellan, which soared 13.6 per cent; and Carsales.com, which rose more than 5 per cent.

Morningstar’s head of equities Peter Warnes said profits and dividends had been fairly resilient across the market, but this reflected conditions in the year to June and the environment was weakening. “As we move into FY24, economic conditions are going to get worse rather than better,” Warnes said.

The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.