Dividends globally are at a record high, but can this last?
By James Dunn
Capital growth provides the most excitement for share investors, but the humble dividend is no slouch: over the long term, dividends typically account for about 40 to 50 per cent of the total return earned by stock investors.
Unlike the share price, the dividend is something that a company can, to a large extent, control – and dividends are rising.
According to the Janus Henderson Global Dividend Report, in the June 2017 quarter a quarterly record of US$447.5 billion in dividends was paid to investors globally, a 5.4 per cent year-over-year increase.
Underlying dividend growth – the total increase in dividends adjusted for special dividends, currency changes, timing and index changes – was 7.2 per cent, the fastest rate of dividend growth since late 2015.
US companies led the way with a 9.8 per cent surge in dividend largesse, to US$111.6 billion, as healthier corporate profits flowed out to investors.
Janus Henderson forecasts that US$1.208 trillion in dividends will be paid in 2017, up 3.9 per cent on 2016, with US banks the largest contributor to dividend growth.
Australian dividend payments jump
CommSec chief economist Craig James estimates that A$26 billion in dividends was paid to Australian shareholders from the June 30 (mostly annual) results, on top of A$22 billion in the interim reporting season earlier in the year.
In the 2017 financial year earnings reporting season, 64 per cent of companies increased their dividends from a year ago, while only 14 per cent cut them.
Jane Shoemake, investment director at Janus Henderson, says the rise in global dividends is being driven by a “supportive and broadening global economic backdrop”, with the world’s 20 largest economies all expected to grow this year.
“For the first time since 2010 we have seen global economic forecasts being upgraded rather than downgraded and this, combined with a normalisation of inflation rates, has led to stronger nominal growth, which has boosted company earnings and ultimately dividends,” she says.
Alex Vynokur, chief executive officer at exchange-traded fund (ETF) issuer BetaShares, adds that a greater focus on shareholder returns in the European region and Japan is also helping to translate better sales performance into earnings and dividends.
Is the dividend boom costing economic growth?
While the dividend boom is a boon to shareholders, particularly in a world of low interest rates, some say there is an economic cost.
Australian companies pay dividends of more than 70 per cent of profits compared to an average of less than 50 per cent average globally.
Paul Docherty, senior lecturer in banking and finance at Monash University, has argued for several years that this has the potential to come at the cost of economic growth, through less business investment.
In this argument, the increased demand for fully franked dividends from Australian investors, particularly from self-managed superannuation funds, which own an estimated 16 per cent of the Australian stock market, is acting as a hindrance to investment.
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Companies punished for cutting dividends
An interruption in dividend flow can be savage.
In August 2017, the Australian telecom, Telstra, told shareholders its days of paying out almost 100 per cent of profits in dividends were over.
From the 2018 financial year it would adopt a dividend payout ratio of 70 to 90 per cent, in line with its global peers and fellow large listed Australian companies.
Investors slashed the share price almost 10 per cent, to A$3.91, and it has further declined to about A$3.46.
In November 2017, US industrial heavyweight General Electric (GE) halved its quarterly dividend to 12 US cents a share, the lowest quarterly dividend since 2010. GE shares promptly fell 14 per cent.
Companies have striven to give themselves as much flexibility as possible on the dividend front.
Between 2000 and 2010, global mining giants BHP and Rio Tinto operated a “progressive dividend” policy, which guaranteed that dividends never fell. When slumping commodity prices pitched both into loss in 2016, they bit the bullet.
In February 2016, BHP slashed its interim dividend by 75 per cent – the first cut since 1988 – to US 16 cents, about half of what the market expected, after reporting its first loss in more than 16 years. The mining giant abandoned the progressive dividend policy, committing to a payout ratio of 50 per cent of underlying earnings over the longer term, with the possibility of extra amounts depending on circumstances at the time.
Rio Tinto told shareholders at its interim 2016 result that a progressive dividend policy was “not appropriate” for a cyclical industry such as mining and from 2017, returns to shareholders would be based on profit.
Fast-forward to August 2017, and the benefits of this flexibility were on show: BHP more than tripled its final dividend; while Rio Tinto showered its shareholders with the biggest interim dividend in the company’s history, more than double the previous year.
Will dividends continue to rise?
Vynokur expects the trend of rising dividends to remain in place, driven mainly by the positive economic outlook.
“Provided companies are guided by shareholders they will seek to produce the best returns possible, and split this as desired between capital and income,” he says. “It’s arguably better to pay out (higher) dividends than to invest in areas that might offer relatively low returns.”
Shoemake also believes that the economic environment affords sufficient scope for the majority of dividend-paying companies to continue generating enough free cash flow to pay their dividends, invest in their business and not become overly indebted.
She says dividend cuts tend to be specific to either an industry or a company.
“In the last commodity downturn, several mining and oil companies cut their dividends, but overall dividend payout ratios are healthy for global markets,” she says.
“Corporate balance sheets in aggregate look robust and sufficient free cash flow is being generated to cover dividend payments.”
Will shareholders remain at the top of the investment food chain?