Australia’s biggest dividend yield shrinkers

Some blue-chip yields are shrinking … for all the right reasons.

Summary: In the hunt for yield, investors have flocked to the big banks and Telstra. Their share prices have soared, but this has eroded their dividend yields. That’s not so much a problem for investors who got in on the ground floor, but those who missed the boat will need to look elsewhere for companies paying good yield returns and whose share prices are likely to rise in 2014.
Key take-out: Dividend yield shrinkage can reflect a rise in the share price, but beware when yield percentage growth reflects a drop in a company’s share price while its dividend remains the same. A dividend cut could be around the corner.
Key beneficiaries: General investors. Category: Shares.

Investors who missed out on this year’s stellar run in the equities market are watching the potential income returns from Australia’s biggest companies shrink before their eyes.

Eureka Report has compiled a list of blue-chips out of Australia’s largest 50 companies that have seen their dividend yields fall over the past 12 months.

The research shows opportunities in traditional high-yielding stocks are quickly drying up for income-starved investors yet to delve into the sharemarket. Thirty companies out of the S&P/ASX 50 Index have had their yields shrink by a sizeable margin in the past year, falling on average to 3.7% from 4.4% – a compression of 70 basis points, or the equivalent of almost three interest rate cuts.

But, for many of these companies, the lower yields aren’t a function of dividends per share being cut. Rather, they are due to their surging share prices as more cash-heavy investors rotate into the stockmarket for income, driving up demand. As a share price rises, the yield percentage on its dividend will fall.

The list of the 10 biggest yield shrinkers is dominated by the big banks, which have experienced very strong share price growth over the last year, Telstra (TLS), and some of the heavyweight industrials like Amcor (AMC) and Brambles (BXB), as shown in the table below.

10 biggest shrinkers

Yield 1 yr agoCurrent yield*Reduction
Iluka Resources3.88%1.79%-2.09%
QBE Insurance4.75%2.76%-1.99%
National Australia Bank7.20%5.71%-1.49%
Crown Resorts3.47%2.21%-1.26%
*Based on share price 11/12
Source: Bloomberg

Investors late to the sharemarket revival party have had to pay a higher entry price and settle for lower yields, and have had to bear a higher risk of capital losses on their investments because some stocks are now seen to be overvalued.

For example, National Australia Bank (NAB) is third on the shrinkers list as its yield has gone down by 150 basis points to 5.7%. But it is the best performing big bank this year: its share price has soared 31.5% compared to S&P/ASX 50’s 10.8% rise. The next best performing bank, ANZ, lifted 21.2%.

Commonwealth Bank (CBA) – widely regarded for its yield as Australia’s biggest company – came 16th on the list. As its share price has climbed almost 20% this year, its yield has fallen around 50 basis points to 4.8%.

But some blue-chip yields have plummeted because their share prices have fallen along with their dividend payouts.

Shares in Iluka Resources, the number one dividend shrinker, have dropped 8.9% in the past 12 months, and the stock’s return on investment has plunged 209 basis points to 1.8%.

The mineral sands producer’s latest interim dividend was cut to 5 cents a share – 80% below the previous corresponding period – as the company was unable to generate enough free cash flow in the first half (Iluka follows the calendar year). Its previous final dividend was also cut, falling to 10 cents a share from 55 cents a share.

Analysts on average forecast this year’s final dividend to increase to 20 cents a share, anticipating improved market conditions and fewer one-off charges in the second half.

Similar to Iluka, QBE Insurance’s current yield is almost 200 basis points below its yield a year ago despite a sharp fall in the insurer’s share price after the company issued a shock profit downgrade on Monday.

The company, which was one of the best performers out of the S&P/ASX 50 Index this year, crashed more than 30% after warning the market that it expected a net loss of $250 million for 2013 due to its struggling US businesses. QBE had cut the past two dividends to a total of 30 cents a share from 65 cents a share, but the market had been expecting that the insurer was on the path to recovery.

Disregarding why yields are falling for many of Australia’s blue-chip companies, it’s important to highlight it’s not too late for those investors who missed out in 2013 – they just need to look elsewhere.

On the flipside, yields from the other 20 companies in the S&P/ASX 50 – some of which haven’t historically been regarded as yield stocks – have gone up by 60 basis points on average. That’s because their share prices have fallen, but their dividends have remained stable.

A number of these companies’ yields increased as their share prices plunged on performance issues. Indeed, mining services group WorleyParsons and insurer IAG, which have seen their dividend yields increase the most since the end of 2012, have been highlighted as being most at risk of cutting their dividends next year (see Thirty dividend income threats).

But within the list of dividend growers, resource stocks are beginning to find a foothold. Woodside (WPL), Rio Tinto (RIO) and BHP Billiton (BHP) have notably increased their dividend payments – and are expected to increase them further in the future when their cost-cutting measures come into fruition. Other giants like Santos (STO) and Oil Search (OSH) are also anticipated to grow their yields as their major projects enter production (see Tim Treadgold’s Mining the hunt for yield).

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