How concerned are CEOs and boards about dividends? Pretty concerned it seems.
Nomura says one-year forward payout ratios on the S&P/ASX 200 Index are now about 65 per cent. A year ago it was 59 per cent.
Macquarie says payout ratios are even higher. The Australian investment bank estimates that over 12 months payout ratios have gone from 62 per cent to 68 per cent.
“There is some discrepancy in the methodology of the calculation, but the direction is the same - i.e. payout ratios have increased by about 600bps,” says Aberdeen Asset Management’s Brett Jollie. “This is in large part a response to heightened demand from investors who are seeking yield in an environment of low cash and bond yields.”
Less capital is being allocated to “growth” due to a more uncertain outlook, so the companies are able to allocate more for dividends, according to Jollie. Moreover, most companies have well capitalised balance sheets, due to extensive repair during the financial crisis years, and so can afford to pay out excess capital in the form of dividends.
Westfield Retail Trust recently changed its distribution policy to allow for a payout of up to 100 per cent of distributable earnings. This is not sustainable in perpetuity, as there is maintenance capital expenditure, but given its gearing is so low, it can sustain this for the foreseeable future, according to Jollie.
“When companies' earnings decline only marginally, they still hold the dividend flat as most managers respect that retail investors rely on dividends as an income stream,” says Jollie. “This obviously leads to a higher payout ratio.”
For the banks specifically, after four to five years of building up their capital bases, they are now comfortable that they have reached adequate capital levels under Basel III. This has allowed them to gradually bump up their payout ratios, says Jollie.