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Dividend growth tipped to flatten

Glenn Freeman  |  17 Sep 2018Text size  Decrease  Increase  |  
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Dividend payout figures ticked up again in the 2018 financial year, climbing more than 10 per cent to about $40 billion, from $35 billion last year, according to Morningstar's head of equity research, Peter Warnes.

This exceeded overall year-on-year earnings growth of 9 per cent year-on-year.

"Capital management initiatives were front and centre, and my gut feel is that's not going to be sustainable. I think we're going to see a flattening in payout ratios, and lesser dividend growth going forward," Warnes says.

More than $830 million was paid out in special dividends alone by ASX 200 companies in the full-year 2018 earnings season - across nine companies.

Also known as extra dividends, special dividends are one-time distributions of corporate earnings to company shareholders, usually stemming from exceptional profits during a given quarter or period.

mining commodities iron ore

Commodities companies have been among the higher dividend payers of late

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These were paid by companies from a broad range of sectors, including mining, consumer cyclical, listed property and telecommunications. Whitehaven Coal (ASX: WHC), Woolworths (ASX: WOW), Telstra (ASX: TLS) and Suncorp (ASX: SUN) are among the most well-known companies that paid special dividends in fiscal 2018.

What's a buyback?

Share buybacks are also commonly used by company management to restructure corporate capital and return money to shareholders.

Also called a share repurchase, the concept is this: if a company's management feels its share price is lower than market factors and actual performance suggests it should be, it can buy back a proportion of its stock from shareholders.

Reducing the number of shares causes a share price jump. The overall value of the company hasn't changed, but this overall market capitalisation is now spread across a smaller number of individual shares.

When Australia & New Zealand Banking Group (ASX: ANZ) announced a $1.5 billion share buyback in June this year, its share price increased by about 80 cents a share.

In management speak, this was part of a broader "transformation program", the progress of which "means we are able to return this surplus capital to shareholders, while retaining appropriate flexibility to invest in our business," said ANZ chief financial officer Michelle Jablko.

There are various pros and cons of these so-called capital management initiatives - some experts believe they can be overused and may send bad signals.

One view is that management focused on putting together such programs is less engaged in its main task of running and expanding their business. They may also indicate management has exhausted other means of boosting – or maintaining – its share price.

Regardless, they're commonly used by companies. Almost $2.5 billion of buybacks were announced after the first-half earnings season in 2017 alone, from the likes of QBE ($1 billion), Rio Tinto ($500 million) and Coca-Cola Amatil (ASX: CCL) ($350 million).

They're just another way dividends are used by companies to shape share price and balance their multiple obligations to customers, employees and shareholders.

 

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Glenn Freeman is senior editor for Morningstar, based in Sydney.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is senior editor for Morningstar Australia

© 2021 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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