Markets: Limits to a dividend deluge

Hefty dividends may become an increasingly unaffordable luxury in a tougher economic climate – yet companies are still making big payout promises.

At a time where some sectors face a tougher economic outlook, investors should be questioning if companies are right to be maintaining or even increasing dividends.

Boral Limited (BLD) today declared a 6 cent final dividend, bringing the annual total to 11 cents. The company reported a loss of $212 million for the financial year after accounting for significant items, organisational restructuring costs and impairment charges.

Not including Boral’s significant items, Boral’s earnings per share were unchanged at 13.6 cents. In a period of static earnings growth and declining cash balance the final dividend payment seems questionable, or at least too high.

Over the financial year, Boral’s cash was reduced by 25 per cent to around $150 million. After payment of the final dividend, Boral will have a cash balance of around $100 million. The outlook for the coming year includes external pressures, especially for construction and cement and building products.

Only last week Oz Minerals declared a 10 cent interim dividend, confusing some analysts. It was thought cash could be used for acquisitions, given the falling cash balance and few opportunities to replenish this from ordinary operations.

With Oz Minerals’ net income expected to continue falling, paying a dividend doesn’t make sense. Commodity prices are too fickle to bank on higher prices. Investors shouldn’t demand a dividend from a company losing money.

After a horror year fuelled by a falling gold price and massive asset writedowns, Newcrest binned its final dividend. This was not pleasing to investors who had seen the share price enter a downward spiral over the past six months, but prudent for the long-term financial health of the company.

With the official interest rate at 2.5 per cent, the yield on equities is considerably more appealing. As a result, investors have justifiably given this new emphasis. The question now is, are boards doing the right thing for investors over the long term or are they trying to please investors immediately? As politicians throw cash about in a grab for votes, boards should be wary of catching election fever and overdoing distributions.

Dividend theory asserts cutting dividends is a bad signal about your financial state and future earnings prospects. This is perhaps a little outmoded in modern day investing. With so many analysts covering the majority of stocks in the ASX 300 problems are often know long before dividends are cut. Add to this the ASX continuous disclosure rules and the market should be well informed.

If companies come back to the market in 12 or 18 months’ time looking to raise equity, existing shareholders risk being diluted. Of course you can participate if you have the cash, or you could be cut out entirely with an institutional investor only placement. Investors would question the value of previous dividend payments at this time.

Even worse than raising equity would be raising additional debt, increasing company risk.

Dividends should remain at the discretion of the board, considering existing cash balances and future cash requirements in a moderate economic environment and not be dominated by what investors want now.