Enjoy special dividends while they last

Special dividends seem back in vogue as the reporting season passes its halfway mark and most companies enter a period of consolidation.

Despite tough operating conditions across most sectors, insurance leader Suncorp, Coca-Cola Amatil, Wesfarmers and Woodside Petroleum were among the companies to announce a special dividend this profits season.

Equity Trustees chief investment officer George Boubouras said it made sense to return capital to investors rather than hang on to the cash.

Suncorp rewarded long-suffering investors 20¢ a share after selling a bunch of soured commercial property loans, while coal to supermarket conglomerate Wesfarmers thrust almost $600 million, or 50¢ a share, into investors' pockets to thank them for enduring its high-stakes decision to bet the company on Coles.

Coca-Cola Amatil, meanwhile, paid its 2.5¢ special dividend in the wake of savage cost cuts, including closing a water plant at Peats Ridge, rationalising production at its Smithfield plant and axing 77 jobs.

Woodside chose to reward investors with a US63¢ special dividend, increasing its shareholder payout ratio from 50 per cent of earnings to 80 per cent after its free cash flow entered positive territory for the first time since 2004.

But Mr Boubouras expected that dividend strategy to flip in the next six months, as companies begin to feel the effects of lower interest rates and a depreciating Australian dollar.

"It has been an extraordinary tough operating environment for corporate Australia in the past couple of years, and the defensive businesses are more than happy to pass on any additional sort of special dividends given that's what the market is hungry for," Mr Boubouras said. "That's quite appropriate.

"But if there is a cyclical recovery in the the economy, which is what a lower rate environment and a lower Aussie dollar is about, then there is going to be a bit of a change in sentiment. You want those companies not to give back the money and to go and do something else with it. It will be a different sort of investment climate."

Mr Boubouras expected a quick switch from defensive and high-dividend paying stocks in the coming months, with investors tipped to pour cash into growth stocks such as transport companies.

"What's the evidence of that? That is the lower cash rates feed through to obviously stimulate the economy and what that leads to in our world is a steeper yield curve.

"That steeper yield curve is indicative of increased economic pulse in the future, therefore more GDP created, therefore ... more earnings growth versus the previous year."

Nevertheless, Citi equity strategist Tony Brennan said doubts about earnings growth in the year ahead would continue to linger. But it wouldn't all be bad news.

"For their part, company managements haven't been too gloomy about the outlook, although most acknowledge the uncertainty," he said.

David Turner, chairman of Commonwealth Bank (which did not pay a widely expected special dividend), was expecting 2013-14 to be much like the previous year.

But he said the improvement in the global economy had been better than anticipated, particularly in the US, while political concerns in China have seem to abated.

Like many companies, he said CBA's main areas of economic focus would be the level of confidence in Australian businesses and households, China and the price of resources, the effects of a depreciating Aussie (particularly on export-sensitive companies), and the stability of funding markets.

"Indicators relating to all these factors have been mixed over the past six months, and we expect that to remain the case in the near term," Mr Turner said.

IG Markets strategist Evan Lucas said the biggest theme from earnings season so far was consolidation, citing that of the companies that reported, 52 per cent had improved their earnings.

"The winding down of discretionary spending is working and these companies are make the right decisions in this challenging environment," Mr Lucas said.

ANZ chief economist Warren Hogan said there has been a "real need for conservatism" domestically and globally in the past five years, and he did not expect that to change in coming months, despite the foundations (lower interest rates and a weakening Australian dollar) being in place. But like Mr Boubouras, Mr Hogan expected a shift, just not until some time next year.

"There has been a very high level of uncertainty around the world economy. Business confidence globally and domestically has been soft, and so business have had to tread warily," Mr Hogan said.

"That sort of conservatism has been rewarded in the past and its going to take a real shift in underlying growth momentum before businesses start to invest aggressively. I think that's a year or so away."