INSIGHT

In an otherwise gloomy climate for investing, dividends are giving shareholders a ray of hope.

By InvestSMART · 12 Sep 2012

By InvestSMART ·
12 Sep 2012

Comments

In an otherwise gloomy climate for investing, dividends are giving shareholders a ray of hope.

Almost two-thirds of the big listed companies raised their dividend in the latest reporting season, with $32.8 billion paid out to shareholders in 2011-12.

This is no mean feat when you consider that confidence in China's powerhouse economy is eroding, raising all sorts of tricky questions for Australia.

More to the point, the lift in dividends came when overall earnings per share were down 2 per cent during the year.

So how have companies managed to pay out more to shareholders at a time of falling profits? And, most importantly, can it last?

For the most part, the companies that lifted dividends were non-miners that depend on the domestic economy, rather than the miners, which sell their products to the rest of the world.

Primary Health Care is a classic example, increasing its dividend by 38 per cent to 11? a share.

Some miners, such as Fortescue, managed to raise dividends, but these were fairly rare, and the outlook for miners now looks increasingly grim.

At the time of writing, the price of our most lucrative mining export, iron ore, had tumbled more than 30 per cent in the past two months.

This slump is dragging down the entire sharemarket, because miners make up about a third of the bourse.

However, it's having a much smaller impact on the market's dividend growth. Why? Because most miners pay out a smaller share of profits.

According to AMP, resources stocks give just 37 per cent of their profits back to shareholders as dividends, using the rest to fund investment.

In comparison, the "payout ratio" for industrials is 74 per cent, while banks give back 76 per cent of profits.

This means miners can drag down the ASX 200 but they won't necessarily stop dividend growth across the market.

Therefore, analysts reckon non-mining stocks' dividends can keep rising for as long as the domestic economy remains healthy.

Miners, on the other hand, are much more vulnerable.

If global prices stay in the doldrums, CommSec analysts have said, BHP Billiton earnings could be 23 per cent lower than expected, while Rio's could be 41 per cent lower.

Fortescue could fail to make a profit altogether if prices do not bounce back. In short, don't bank on dividend growth from the miners.

Go to Google News, then click "Follow" button to add us.

Share this article and show your support

Frequently Asked Questions about this Article…

Why did dividends rise across the market even though earnings per share fell?

Although overall earnings per share were down about 2% during the year, almost two-thirds of big listed companies raised their dividends and a total of $32.8 billion was paid to shareholders in 2011–12. The lift was driven mainly by non-mining companies that depend on the domestic economy and tend to return a larger share of profits to shareholders.

Which sectors increased dividends the most during the latest reporting season?

Non-mining sectors led dividend growth. Industrials and banks typically have much higher payout behaviour than resources, and many domestic-facing companies lifted their dividends. The article cites Primary Health Care as a clear example, which increased its dividend by 38%.

Are mining dividends reliable right now for income-focused investors?

Mining dividends are more vulnerable. Miners make up about a third of the ASX but generally pay out a smaller share of profits as dividends. With iron ore prices tumbling and analysts warning of sharply lower earnings for major miners, the article cautions investors not to bank on dividend growth from miners.

What do payout ratios tell investors about dividend sustainability?

Payout ratios show the share of profits returned as dividends. According to AMP in the article, resources firms returned about 37% of profits as dividends, while industrials returned about 74% and banks about 76%. Higher payout ratios mean companies are already returning more cash to shareholders, whereas lower ratios (like in resources) suggest profits are more often retained for investment and dividends may be less predictable in a downturn.

How has the iron ore price slump affected the ASX and dividend expectations?

The price of iron ore had tumbled more than 30% in the prior two months, which has dragged down the entire sharemarket because miners form a large portion of the bourse. However, the slump has had a smaller impact on overall dividend growth because many miners pay a lower share of profits as dividends than non-miners.

What do analysts say about the earnings outlook for major miners like BHP and Rio Tinto?

CommSec analysts warned that if global prices stay weak, BHP Billiton's earnings could be about 23% lower than expected and Rio Tinto's could be about 41% lower. The article also notes Fortescue could fail to make a profit altogether if prices do not recover.

Can dividends from non-mining stocks keep rising, and what will that depend on?

Analysts in the article reckon dividends from non-mining stocks can keep rising so long as the domestic economy remains healthy. Because these companies are more domestically focused and generally return a larger share of profits as dividends, their payouts are less tied to global commodity price swings.

What specific company examples illustrate the recent dividend trends?

The article highlights Primary Health Care as a non-mining example that lifted its dividend by 38%. It also notes some miners, such as Fortescue, managed to raise dividends but that these were fairly rare and that the outlook for miners looks increasingly grim given the sharp falls in commodity prices.