New analysis has highlighted a “concerning trend” in the 2023-24 financial year as Australian companies take a more conservative approach to shareholder payouts, Martin Currie has highlighted.
According to the asset manager, the average payout ratio in the market has fallen from 62 percent pre-COVID-19 to 53 percent today.
Reece Birtles, Martin Currie’s investment director, highlighted the wider implications of this change, highlighting not only the reduction in income returned to shareholders, but also the increased emphasis on reinvestment in growth opportunities.
“One of the trends that has happened since COVID-19 is that companies have become much more conservative in terms of the payout ratio and the debt ratios that they are willing to meet,” Birtles said during of a post-season reporting webinar.
“There is a real conservatism or hoarding of retained earnings that are not necessarily reinvested in large areas. This is a concern in terms of shareholder returns.
A notable example is coal producer and developer Yancoal, which told its shareholders in August that it would not distribute an interim dividend.
According to Birtles, most companies are lowering or reducing their payout ratios due to earnings constraints. “We have seen this action from Mineral Resources, Dexus and Insignia Financial,” he said.
Woodside Energy Group is of particular concern to Martin Currie as its strategic investments in a number of new projects in North America have put further pressure on its free cash flow and ability to fund strong dividends in the future.
Apart from these companies, Birtles said the resources sector as a whole had performed “remarkably” during the financial year.
“During the last 12 months [they] generated good dividends. But the outlook is now much more difficult. Most of the downward revisions to future dividends are in the resources sector,” Birtles said.
He added that banks are also a concern, even though they have generated strong profits and reasonable dividends.
While Commonwealth Bank announced a record dividend of $2.50 per share, fully francised, to take dividends to $4.65 per share in the financial year, Birtles said this did not fully reflect the performance of the bank.
“What has changed the most is stock prices. So Commonwealth Bank shares have risen significantly over the last 12 months, with dividends broadly stable,” he said.
Ultimately, Birtles believes there is a widespread lack of pressure on boards and management to reprioritize shareholder payouts.
“I think companies have become very comfortable being conservative and investing in projects that are not necessarily [creating] the highest yield, they improve the quality of the company. So there’s been, I would say, a lack of pressure on them lately,” he said.
He argued that this could also be the result of a dynamic market, in which companies choose to conserve capital expenditures and make investments that are not conducive to generating current profits.
“Once the dynamic bubble bursts, we expect a return to dividends and an increased focus on improving shareholder value,” he said.
“For investors, dividends will continue to play an important role as they provide more reliable returns than capital gains and can serve as a ‘safety net’ in times of increased volatility.”
