There has been a definitive shift in investor attitudes in the post-global-financial-crisis world. Investors want money now as opposed to having patience to wait for future gains.
Dividends aren’t the only way a company can return value – share buy backs and capital returns are becoming prevalent alternatives. However, giving cash back to investors brings into question the long-term capital management of a company and corresponding prospects for growth. Investor pressure is strangling the opportunity for management to make decisions that deliver future profitability.
Market reaction has been decisive when reality does not meet dividend-payment expectations. When Commonwealth Bank reported results in August the market sent the country's largest bank down 1.1 per cent after it failed to announce a special dividend. Even a raise of the final dividend wasn’t enough to push the Commonwealth Bank into the green on a day when the S&P/ASX 200 index finished flat.
Low interest rates mean it is entirely feasible for companies to return capital using a combination of cash reserves and debt. Or alternatively by buying shares back on market. Perhaps flagging that management have no immediate investment activity on the horizon, Wesfarmers will return $579 million to shareholders in December. The capital return is expected to be funded via debt facilities already in place.
It is well known Australian investors, particularly self-funded retirees, are hungry for yield in this low-interest-rate environment. At the moment, the market is satiating these demands.