Australia’s biggest income stocks are cutting their dividends – what does this mean for income strategies in the future?
The coronavirus pandemic has been the most unique and damaging event on an economic level in the last 100 years, impacting almost all asset classes. Even gold stocks and bonds, typical safe havens in times of turmoil, have experienced some incredible volatility during the low points in April. And unlisted assets such as commercial and residential property have seen once-resilient tenants unable to pay their rent, resulting in the vast majority of asset classes around the world cutting their [keyconcepts slug=”dividend” title=”dividends/distributions”] in order to preserve cash. On the ASX, perhaps only the listed hybrids have been the only sector to have escaped the turmoil, although even the hybrids were sold off early on the fear that interest payments would be cut.
Perhaps no sector represents income for retail Australian investors than the big four banks, and this is where the biggest hit has come from so far. Acting as the economy’s safety net which will undoubtedly lead to a large number of loans going sour, the banks have taken the prudent course of action and deferred their dividends or raised capital while paying a reduced dividend in NAB’s case. In ANZ and WBC’s case, many analysts are of the view that the deferred [keyconcepts slug=”dividend” title=”dividends”] will be cancelled as the reality of the economic situation becomes clearer.
Australia also stands out as one of the success stories in dealing with the health crisis, and therefore one of the most likely economies to recover quicker. But at the same time, Australian listed companies have raised more (as a percentage of total market capitalisation) than any other major developed stock market which seems counterintuitive. The reason for this though is that Australian companies, largely because of the benefit of franking credits, pay out the largest percentage of profits as dividends. It remains an Australian mentality to buy stocks for dividend yield, even when the tax advantage of holding capital gains beyond twelve months is so significant. And frankly, that mentality is a hindrance in a low-interest rate world; why return capital to shareholders who will return 1% in the bank when the company’s return on capital is so much greater? This is likely a big reason why the S&P500 in the U.S. has outperformed the ASX 200 in Australia over most time periods.
Having said that though, the simple reality is that while most companies may be better placed to reinvest their profits, while investors demand that income we are unlikely to see any real shift. It also needs to be remembered that for the biggest dividend payers in Australia – the big four banks, Telstra (TLS), the big insurers etc – the ability to allocate those profits to acquisitions is constrained by their size and hence the likelihood that the ACCC would knock back many of the smarter possible acquisitions. And corporate Australia has, for the most part, shown that investing overseas is a flawed strategy so investors holding these stocks for their income stream should look at this pandemic as the one-off event that it is, and expect that once the economy recovers it will be business as usual.
