Craig James, Chief Economist Twitter: @CommSec IMPORTANT INFORMATION AND DISCLAIMER FOR RETAIL CLIENTS The Economic Insights Series provides general market-related commentary on Australian macroeconomic themes that have been selected for coverage by the Commonwealth Securities Limited (CommSec) Chief Economist. Economic Insights are not intended to be investment research reports. This report has been prepared without taking into account your objectives, financial situation or needs. It is not to be construed as a solicitation or an offer to buy or sell any securities or financial instruments, or as a recommendation and/or investment advice. Before acting on the information in this report, you should consider the appropriateness and suitability of the information, having regard to your own objectives, financial situation and needs and, if necessary, seek appropriate professional of financial advice. CommSec believes that the information in this report is correct and any opinions, conclusions or recommendations are reasonably held or made based on information available at the time of its compilation, but no representation or warranty is made as to the accuracy, reliability or completeness of any statements made in this report. Any opinions, conclusions or recommendations set forth in this report are subject to change without notice and may differ or be contrary to the opinions, conclusions or recommendations expressed by any other member of the Commonwealth Bank of Australia group of companies. CommSec is under no obligation to, and does not, update or keep current the information contained in this report. Neither Commonwealth Bank of Australia nor any of its affiliates or subsidiaries accepts liability for loss or damage arising out of the use of all or any part of this report. All material presented in this report, unless specifically indicated otherwise, is under copyright of CommSec. This report is approved and distributed in Australia by Commonwealth Securities Limited ABN 60 067 254 399, a wholly owned but not guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124. This report is not directed to, nor intended for distribution to or use by, any person or entity who is a citizen or resident of, or located in, any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or that would subject any entity within the Commonwealth Bank group of companies to any registration or licensing requirement within such jurisdiction.

Economics | September 9, 2020

Spotlight on dividends: Payouts slashed Economic and Financial market perspectives March/April payouts: In the interim reporting season in February 2020, S&P/ASX 200 companies

announced dividend payouts to shareholders totalling $27.5 billion. Then over March and April many companies reacted to the COVID crisis by cutting spending, abandoning guidance and/or shelving or cancelling dividends.

September/October payouts: With the conclusion of the August report season, around $21.6 billion will be paid out to shareholders in the next two months as dividends. While well down from the payout season six months ago, the dividend payments also compare with around $29 billion in payouts in both the February 2019 and August 2019 earnings seasons.

Fewer companies pay dividends: In August 2020, only 69 per cent of ASX 200 companies elected to pay a dividend. That is down from 87 per cent of companies that reported half-year earnings in February and down from the 88 per cent that paid dividends in the August 2019 reporting season.

Injection into the economy: The biggest week for payouts is the week beginning September 28 when $8.4 billion will be paid out by listed companies to their shareholders.

What does it all mean? It’s all about COVID-19. Over the last six months the global pandemic has restricted domestic and global

movements, forcing communities and businesses into lockdowns. Governments have provided unprecedented support for people and businesses.

Propped up by government spending and wage subsidies, some businesses have done well. Others – especially in the hospitality and travel sectors – have struggled to survive. Overall, companies have found it harder to make money. As a result they have cut spending and dividends. Instead, companies have held on to cash to ensure they survive the difficult times.

Of the 137 companies to report for the year to June 2020, 103 companies or 75 per cent managed to produce a statutory profit (net profit after tax). The last time a similar low outcome occurred, around 80 per cent of companies issued a profit for the 2014/15 year.

In aggregate (summing all the profit results), earnings were down 38 per cent on a year ago.

Only 69 per cent of companies elected to pay a return to shareholders. The average over the past 20 reporting seasons stands at 86 per cent. In aggregate, dividends fell by 36 per cent on a year ago.

Aggregate cash at hand (cash as at June 30) rose by 31 per cent on a year ago (up from $84 billion to $110 billion). Once the half-year reporting companies are added in, cash levels totalled a record $141 billion as at June 30 2020, up from $111 billion as at June 30, 2019.

Over the period from mid-July to early November, around $21.6 billion will be paid to shareholders as dividends, down from around $29 billion paid out in

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the August 2019 earnings season a year ago.

Some shareholders will receive the dividends as cash and others will deploy the proceeds through dividend reinvestment schemes. While the majority of funds will be paid to domestic investors, other funds will go offshore to foreign investors. And while some of the dividends are paid to ordinary investors, other payments are paid to superannuation funds, thus with more limited short-term consequences for the economy.

While dividends flow at this time every year, more shareholders may look to spend the dollars in coming months, supporting their standard of living given the challenging economic environment.

The Profit Reporting Season Regular readers would be aware that each six months CommSec undertakes a detailed review of the profit

reporting season – the time when companies report half-year or annual results for the period to June or December. (A far smaller proportion of companies have a different reporting period, such as March or September).

Read more at www.commsec.com.au/reportingseason

The latest report focussed on the 137 companies in the S&P/ASX 200 that reported earnings for the year to June 2020 (2019/20 year). Another 31 companies reported results for the six months to June.

To recap, the China-US trade war dominated in the second half of 2019 together with the on-going uncertainty of Brexit. The global economy slowed, causing a raft of central banks to cut interest rates to support growth.

Closer to home, the Reserve Bank cut interest rates three times. In response, the Aussie dollar eased, boosting the fortunes of exporters, miners and globally-focussed companies.

Then in the second half of the 2019/20 final year (six months to June), COVID-19 dominated proceedings. Economies had to be locked down to prevent the spread of the virus. Governments spent unprecedented sums to support individuals and businesses. The Reserve Bank slashed rates to new lows.

Once the spread of the virus was suppressed, states and territories slowly eased restrictions – some more successfully than others.

And the virus has taken its toll with the economy in recession for the first time in 29 years.

Profits

As noted above, 75 per cent of companies reported statutory profits (net profit after tax) for the year to June. On average over the past decade around 88 per cent of companies reported a profit rather than a loss. In fact, 92 per cent of the companies that announced interim results for the half year to December 2019 reported a profit.

Of the companies to report a profit for the year to June, 48 per cent managed to lift earnings while 52 per cent recorded a fall in earnings.

In aggregate (summing all the profit results), earnings were down 38 per cent on a year ago. Revenues were up in total by 3.4 per cent, which were more than matched by a 4.1 per cent lift in expenses.

Dividends

Looking back over the six months to December 2019 (interim results), just over 87 per cent of the ASX 200 companies issued a dividend. But for the full year to June 2020, only 69 per cent of companies have elected to pay a return to shareholders. The average over the past 20 reporting seasons stands at 86 per cent.

Almost 23 per cent of companies lifted dividends; 12 per cent held dividends steady; 53 per cent of companies reduced dividends or didn’t pay a dividend; and 12 per cent of companies that didn’t pay a dividend last time (in

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Economic Insights: Spotlight on dividends: Payouts slashed

the February reporting season) also didn’t pay a dividend this time.

Of those trimming dividends, 20 per cent of all companies or 27 companies that paid a dividend last time indicated that they won’t be paying a final dividend. And 47 companies (34 per cent) paid a reduced dividend.

Of the 94 companies paying a dividend, 33 per cent lifted dividends; 17 kept the payout steady; and 50 per cent cut the dividend.

In aggregate, dividends fell by 36 per cent on a year ago.

Cash

Profits are down, so companies have elected to trim or not pay a dividend and instead use the cash to shore up stretched balance sheets. Cash conservation has been a highlight of recent business-related surveys.

Aggregate cash at hand (cash as at June 30) rose by 31 per cent on a year ago (up from $84 billion to $110 billion)

Overall 70 per cent of companies lifted cash levels from a year ago, notably real estate investment trusts (REITS).

Once the half-year reporting companies are added in, cash levels totalled a record $141 billion as at June 30 2020, up from $111 billion as at June 30, 2019.

The Dividend Timeline IRESS provides data on the dividends declared by companies, the number of shares on issue and the pay date of

the dividends. So it is possible to derive a dividend timeline. The ASX 200 companies were assessed. As always there are complications to the analysis such as where the shareholders are based, whether dividend

reinvestment plans operate, special dividend payments and currency translation effects for foreign investors. But the aim is to get a broad idea of the timing and magnitude of dividend payouts.

CommSec estimates that around $21.6 billion will be paid to shareholders by ASX 200 companies from mid-July to late-October, but largely from mid-September to mid-October. The key period for dividend payments is the four-week period beginning next Monday, September 14. Over that four-week period, $17.8 billion will be paid out as dividends by listed companies:

in the week ending September 18, dividends totalling $2.2 billion will be paid;

in the week ending September 25, $5.4 billion will be paid out as dividends;

in the week ending October 2, dividend payments totalling $8.4 billion will be made; and

in the week ending October 9, distributions total $1.8 billion

The importance of dividends If you indexed the All Ordinaries index and the All Ordinaries Accumulation index at January 2004 it would show

share prices (All Ords) have almost doubled in the period since (despite falls from record highs) while total returns have risen almost 4 times. The differential (dividend growth) especially widened from the low point for shares after the global financial crisis in February 2009. So dividends have taken on greater importance over time.

There are a few reasons for this. Investors have been more cautious about buying shares, despite the fact that Australian companies have been making money and strengthening balance sheets. So share prices have not fully captured the stronger fundamentals. (Interestingly there has been a surge of retail interest in shares in the COVID-19 environment).

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The economy has also continued to mature and the “potential” growth rate has eased from around 3.5 per cent to 2.5 per cent. Many of Australia’s biggest companies operate in mature industries. So while companies continue to generate good returns, growth options are more limited. Add in the fact that inflation has also slowed from around 2.5 per cent to around 1.5-2.0 per cent.

Over time, Australian companies have to compete with property markets and overseas equities to secure the affection of investors. With share prices seemingly constrained by a range of influences, that puts more onus on companies to offer attractive dividends or to support share prices with buybacks.

Until recently there has been some reluctance by companies to plough back cash into the business. And expansion, renewal, replacement or efficiency measures have boosted the funds that can be made available as dividends.

Companies remain keen to pay dividends. Even in the current challenging times with profits down or non-existent, some companies have sought to reward the support of shareholders. These companies remain confident about the underlying strength of their operations, business model and strategy.

Decisions to pay, reduce or increase dividends are not easy with companies weighing all manner of issues – especially during the pandemic recession

What are the implications for investors? Investors have the usual choice over the next few weeks. Those investors that still elect to receive dividend

payments direct to their bank accounts can choose to spend the extra proceeds, save the proceeds (leave it in the bank) or use the funds in combination with other savings and reinvest into shares or other investments.

And in the current challenging times, it will be interesting which way investors jump.

Some investors – especially those running small businesses – may need the extra dollars to fill gaps in cash flows. For some small businesses, there is no choice, it is a case of survival – all funds must be deployed.

Others may see the benefit of using dividends to supplement other funds and borrowings (such as early withdrawal of superannuation) to buy equipment and thus take advantage of the Federal government’s asset write-off and depreciation allowance changes.

Still other investors may see longer-term opportunities – especially given recent volatility – choosing to channel the dividends into sharemarket purchases.

The course of sharemarkets since the start of the year has certainly been extraordinary. Aussie sharemarkets peaked on February 20 and then fell sharply over the following 22 days – the All Ordinaries down by 37.1 per cent and the ASX 200 down by 36.5 per cent.

From the lows to August 25, the All Ordinaries lifted 38.7 per cent with the ASX 200 up 35.5 per cent. Since then there has been some consolidation with indexes down 3.5-4.0 per cent from the highs.

As many companies stressed when releasing earnings results, the period ahead is very uncertain with many unable to provide earnings guidance. But governments and central banks continue to provide unprecedented support for economies across the globe. There have been encouraging statistics showing that economic recoveries have begun. Although the speed of recoveries varies markedly from country to country. China was first into the virus crisis and is first out.

In Australia, all states and territories except Victoria have achieved success in ‘flattening curves’. A degree of normalcy has returned except movement across domestic and international borders.

Still, much depends on flattening curves, preventing second waves from occurring and coming up with treatments and vaccines for the coronavirus.

CommSec expects the All Ordinaries to be in a range of 6,350-6,750 by end-2020, with the range for the ASX 200 between 6,200-6,600 points. We expect sharemarket returns to be largely flat over 2020, but remain supported by easy monetary and fiscal conditions and still attractive – albeit lower – yields relative to other asset classes. While shares remain ‘expensive’ valuation-wise relative to history, clearly these are not normal times. Earnings from financial assets are low. Corporate earnings will remain challenged in the near-term and dividend payouts are likely to be lower.

Craig James, Chief Economist, CommSec Twitter: @CommSec

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