The future looks bright: Investment banks are predicting solid gains for the ASX next year. Photo: Peter BraigDividends at Australian companies are increasing at the fastest pace among the developed world’s largest stock markets amid project spending cuts and an unstable global economic recovery.
Australian firms paid $US40.3 billion ($44.5 billion) in dividends last year, 89 per cent more than in 2009, according to Henderson Group data. That’s the largest increase among the 10 biggest developed equity markets and compares with a 43 per cent increase in payouts worldwide in that period, the data show.
Investors at Equity Trustees, Threadneedle Asset Management and Epoch Holding who manage a combined $US217 billion say a reduction in capital expenditure from some of Australia’s largest firms will keep pressure on chief executive officers to return cash to shareholders. Business investment shrank the most since 2009 last quarter, dropping more than economists had estimated, a government report showed February 27. Companies from BHP Billiton to Rio Tinto and Woodside Petroleum last month raised payouts.
“Dividends are the great Australian export,” George Boubouras, who helps oversee $US30 billion as chief investment officer at Equity Trustees, said by phone. “For the next three to five years dividend-per-share will continue to dominate until larger companies really start to take on new growth projects which they are still a long way away from. They are going to continue to give cash flow back to the shareholder.”
The S&P/ASX 200 Index offers a forecast dividend yield of 4.8 per cent this year, the highest among the world’s 10 largest equity markets, according to data compiled by Bloomberg. That compares with a 2.2 per cent forecast payout on the Standard & Poor’s 500 index and 2.8 per cent for the MSCI World Index of developed-market shares, the data show.
The S&P/ASX Accumulation 200 Index gained 12 per cent in the past 12 months, recouping losses from the financial crisis. That compares with a 6.9 per cent advance on the S&P/ASX 200 that doesn’t include reinvested dividends and remains 20 per cent below its 2007 peak.
While Australian dividends grew at a faster pace in the past four years than global payouts, they remain a small chunk of the total $US1.03 trillion paid last year, according to Henderson data.
BHP Billiton and Rio Tinto, the world’s biggest mining companies, and Woodside Petroleum, Australia’s second-largest oil and gas producer, all increased the proportion of earnings they paid to shareholders — the so-called dividend-payout ratio — in the past 12 months. The Commonwealth Bank, the nation’s biggest lender, boosted its interim payout by 12 per cent last month, more than analysts had estimated.
About $US9 billion in dividend payments went to foreign investors last year through the third quarter, according to data compiled by the Australian Bureau of Statistics. That’s on course for the largest outflow since 2009.
Australian companies have historically paid out more on average to shareholders than US counterparts due to a tax incentive known as franking credits, which reduce a shareholder’s tax bill by recognising that the company has already paid a levy on its profits.
The S&P/ASX 200 Index gained 4.1 per cent in February, its best monthly advance since July. That left the measure trading at 15.1 times estimated earnings of its constituent companies, compared with 15.8 for the S&P 500 and 15.4 for the MSCI developed markets gauge, according to data compiled by Bloomberg.
BHP on February 18 increased its dividend 3.5 per cent and forecast more cost savings. Rio Tinto boosted its payout 15 per cent last month after a 43 per cent surge in second-half profit, and Woodside said it will pay a final dividend of$US1.03 a share, up 58 per cent on last year.
Bill Priest, who oversees $US38 billion as chief executive officer of Epoch, favors Amcor due to its payout policy. The Melbourne-based packaging company posted dividend expansion of 5.6 per cent in the past three years, according to data compiled by Bloomberg. This will grow a further 7.3 per cent through 2017, forecasts show.
“We have a mutual love affair with Amcor because we look at capital spending the same way they do,” he said.
“We are still going to get pretty good dividend growth. We are going to have dividends continue to be wanted and needed.”
Companies worldwide are not investing enough, according to a record 69 per cent of global asset managers surveyed by Bank of America in February who oversee$US591 billion, with 58 per cent saying they would rather see cash spent on capital expenditure returned to shareholders. For Jonathan Crown at Threadneedle Asset Management, he wants both.
“Companies that are generating cash flow are able to put it back into the company to get good earnings growth but at the same time they are also giving money back to shareholders,” Crown, who helps oversee$US149 billion, told Bloomberg TV in Hong Kong. “The key to long-term returns is this good capital allocation.”
Capital spending in Australia dropped 5.2 per cent in the three months ended December from the previous period, the statistics bureau said last month. That was the biggest decline since 2009 and compares with the median estimate for a 1.3 per cent slide by economists surveyed by Bloomberg News before the report.
Company spending cuts may continue after the US Federal Reserve began tapering record stimulus and amid expectations China will post the slowest economic growth since 1990.
Premier Li Keqiang last week announced a 7.5 per cent target for economic expansion for 2014, meeting the median estimate in a Bloomberg survey. Finance Minister Lou Jiwei said growth below the goal is acceptable, with employment, not the exact level of expansion, being key. BHP relies on China for 29 per cent of its revenue, compared with 35 per cent for Rio Tinto.
For Shane Oliver, the head of investment strategy at AMP Capital Investors, dividend growth shows Australian companies are optimistic about the future and don’t see the need to hold on to excess cash. AMP Capital oversees$US131 billion.
“The surge in dividends is a good sign that companies are confident about the outlook,” Oliver said.