Are Aussie companies on the edge of a dividend spiral?

Australian company dividend payouts are forecast to reach all-time highs for the earnings season ending June 2017, with potential implications for investors.

Among ASX 200 financials, industrials, and commodities stocks, dividend payouts are tipped to exceed $72 billion by June this year, according to February 2017 data from Credit Suisse.

This is up from the previous high of $68 billion in 2015, when Australia's largest listed companies paid out 73 per cent of their earnings as dividends.

Some industry commentators have questioned the sustainability of dividend payments at this level.

"Australia's top companies could be stuck in a dividend spiral," says Jonathan Crown, portfolio manager with global equities fund manager Columbia Threadneedle.

He goes further, saying there are "wider concerns about Australia's economy ... prompting widespread speculation as to whether the country could be on track for a recession."

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The managing director of Perennial, John Murray, is more sanguine--as are most commentators--though also notes the trend of companies paying out higher dividends to investors.

He says aggregate dividends rose by 6 per cent year on year as at the end of the first half of fiscal 2017, referencing CommSec research. The research also found 89 per cent of companies (120 of 135) paid a dividend, and of these, 69 per cent increased dividends.

"Dividend flows are continuing, and that's fantastic for shareholders, but there's always the issue of how much does a company pay out as opposed to reinvesting," says Murray.

He questions whether this trend may be nearing a reversal, suggesting the market may be at an inflection point as the changing interest rate environment and other factors combine to encourage a change of tack.

However, he sees good reasons for this: "There hasn't been a lot of need for reinvestment because company top lines have been soft."

So too does Peter Warnes, Morningstar Australasia's head of equities research: "Business credit growth has not been robust, and that's telling you that companies are not in the borrowing mode."

"Everyone's pointing out [these firms] haven't invested ... then that capital has got to go somewhere. So dividends go up.

"Growth capex is below trend, and therefore cash builds up on the balance sheet, gearing levels are lower--balance sheets are in pretty good shape. And that's showing up with buybacks and capital returns."

Warnes sees good reasons for the current state of high dividend payments among so many large-cap Australian companies.

"You might say we've got inflated payout ratios et cetera, but it's a product of what's been happening in the economy. Whether or not we're at an inflection point is the $64 question," he says.

"Since 2010, businesses haven't really invested ... they've reduced debt, paid out higher dividends, and embraced capital management."

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Glenn Freeman is Morningstar's senior editor.

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