In its latest Australian Large Companies Sector Report, the firm found that investor appetite for higher yielding investment strategies had possibly peaked as company growth potentials are questioned by investors.
“The yield thematic pervading the Australian market has driven the stock prices of higher yielding companies to levels that may be more difficult to sustain in the absence of an increase in the underlying earnings growth,” Zenith senior investment analyst Steven Tang said.
During the period reviewed by Zenith, the firm found the domestic equity market had rewarded those companies that increased their dividend payout ratios. However, managers are concerned that in the future, higher payouts to shareholders will prevent these companies from exploiting growth opportunities.
“Higher payout ratios and special dividends naturally imply a lower level of internal re-investment, which has the potential to hamper the future growth prospects of a company,” Mr Tang stated.
During the review, Zenith found that managers believed the Reserve Bank of Australia rate policy was beginning to gain traction within the economy. Investors are consequently planning to sell higher yielding companies to fund the purchase of companies which are better positioned to capitalise on an increase in domestic economic activity.
The firm, however, notes that managers are likely to remain cautious when investing into cheaper, cyclical companies as their earning streams might change radically with the underlying level of economic growth.
