Markets: Dividend payouts outstrip EPS growth

Companies have been splashing the cash with generous dividend payouts to soothe investors, but the trend may not be sustainable.

We are nearing the end of reporting season and a distinct theme has emerged – dividends per share are growing faster than earnings per share.

Some of the notable increases in earnings per share include Primary Healthcare (PRY), which upped its annual dividend nearly 60 per cent but only had an increase in basic earnings per share of 28 per cent from a year earlier. Online employment classified firm SEEK Ltd (SEK) increased its dividend by 27 per cent against a modest increase in earnings per share of 8 per cent, excluding significant items.

There have been circumstances where earnings per share declined, but dividends were not slashed proportionately. Furniture retailer Fantastic Holdings (FAN) saw earnings slide 35 per cent, but only reduced the dividend for the full year by just less than 20 per cent from the previous year.

On the eve of earnings season, there was talk earnings would be downgraded by as much as eight per cent for the 2013 financial year. This has not come to fruition, with earnings clearly coming in far better than anticipated.                                                                   

The generosity of companies was not anticipated by analysts, with Deutsche Bank advising the consensus is that dividends have surprised to the upside. With central banks around the globe signalling only a modest global recovery, interesting company psychology prevails by giving more cash back to investors.

Perhaps this is reflective of a larger theme emerging as companies see less growth for their core businesses.

Bumper dividends actually have the ASX 200 payout ratio at 70 per cent, bordering on its historical peak. Ironic when, according to Macquarie, revenue growth is at its weakest since the global financial crisis.

Earnings to date have been propped up by heavy cost cutting over the past year. Headcounts have been slashed and non-core operations tempered to help the bottom line stay buoyant.

But as we have gone through reporting season, companies have taken the time to let the market know they think the coming year is going to be tough and to not expect the same earnings growth. Investors take note – companies may not be so generous for the year ahead.

In February when reporting season kicks off again we will be looking for improved outlook for earnings to justify existing dividend growth.

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