New analysis has showcased a “concerning trend” in FY2023–24, as Australian companies adopt a more conservative approach to shareholder payouts, Martin Currie has highlighted.
According to the asset manager, the average payout ratio across the market has dropped from 62 per cent before COVID-19, to 53 per cent today.
Martin Currie’s chief investment officer, Reece Birtles, highlighted the broader implications of this shift, pointing out not only the reduction in income returned to shareholders but also the increased focus on reinvesting in growth opportunities.
“One of the trends that has occurred since COVID-19 is that companies have become a lot more conservative in terms of their payout ratio and the debt ratios that they are willing to run,” Birtles said in a post-reporting season webinar.
“There’s a real conservatism or hoarding of retained earnings that’s not necessarily being reinvested in great areas. That is a concern in terms of shareholder returns.”
A notable example includes coal producer and developer Yancoal, which in August told shareholders that it would not be distributing an interim dividend.
According to Birtles, companies mostly lower or cut their payout ratios due to earnings stress. “We saw this action from Mineral Resources, Dexus and Insignia Financial,” he said.
Woodside Energy Group is of particular concern for Martin Currie, as its strategic investments in a number of new projects in North America have put more stress on its free cash flow and ability to fund strong dividends going forward.
Outside of these companies, Birtles said the resource sector on the whole has been a “standout” over the financial year.
“Over the last 12 months [they] delivered good dividends. But the outlook is a lot tougher now. Most of the downgrades in future dividends are in the resources space,” Birtles said.
He added that the banks are also a concern, despite having delivered strong earnings and reasonable dividends.
While Commonwealth Bank announced a record dividend at $2.50 a share, fully franked, to take dividends to $4.65 a share over the fiscal year, Birtles said this doesn’t fully capture the bank’s performance.
“The biggest thing that has changed is the share prices. So, Commonwealth Bank stocks went up so much in the last 12 months, with broadly flat dividends,” he said.
Ultimately, Birtles believes an overarching lack of pressure is being placed on boards and management to reprioritise shareholder payouts.
“I think companies have become very comfortable in being conservative and investing in projects that are not necessarily [creating] the highest return, they’re improving the quality of the business. So there’s been, I’d say, a lack of pressure on them in recent times,” he said.
He posited that this could also be a product of a momentum-driven market, wherein companies are opting to retain capital expenditure and make investments that are not conducive to generating current earnings.
“Once the momentum bubble bursts, we do expect to see a return to dividends, and more 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 act as a ‘safety net’ during heightened volatility.”
