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Dividend upgrades expected as economy recovers

Nicki Bourlioufas  |  06 Apr 2021Text size  Decrease  Increase  |  
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Analysts expect many Australian companies to upgrade their dividends this year, with an improved economic outlook and balance sheets pushing up earnings.

According to a research note from UBS, consensus earnings per share revisions during the February reporting season led to earnings per share upgrades of 5 per cent across the share market, reflecting a rapid recovery to pre-covid levels. 

However, analysts have been slower to upgrade dividend per share forecasts; consensus opinion still only expects market DPS to recover to pre-covid levels well after financial year 2023.

“Put differently, there appears to be a disconnect between EPS and DPS that the market is missing at the stock-level,” the UBS research says. UBS expects several Australian companies to upgrade dividends, including Spark Infrastructure (ASX: SKI), gas and energy distributor AusNet Services (ASX: AST), Bendigo and Adelaide Bank (ASX: BEN), Suncorp (ASX: SUN), Downer EDI (ASX: DOW), Oz Minerals (ASX: OZL) and Vicinity Centres (ASX: VCX).                                                                                                                      

Daniel Moore, co-portfolio manager of the Investors Mutual Australian Share Fund, agrees that the outlook for dividends for Australian companies is broadly positive and upgrades are likely for some companies.

“In addition, the companies that struggled during covid have typically raised equity, meaning that balance sheets across the board are now generally strong,” says Moore.

“We believe the outlook for dividends in 2021 and beyond is strong, and we expect payout ratios to improve.”

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Banks account for 22 per cent of ASX 200 dividends, and their payout ratios have fallen to 70 per cent from 86 per cent, according to UBS. The Industrials ex Financials account for 31 per cent of ASX 200 dividends and their payout ratios have fallen to 71 per cent from 81 per cent since 2019. The Resources sector accounts for 30 per cent of ASX 200 dividends and its payout ratio has fallen to 62 per cent from 70 per cent.

Banking on bigger payouts

According to Morningstar banking analyst Nathan Zaia, the big banks will definitely return to more normal dividend payout ratios, possibly in the second half of 2021, as earnings rebound after taking large loan loss provisions last year.

“I think the real variable to results will be if the banks are confident enough in the economic outlook to begin releasing some of those provisions,” says Zaia.

“Conditions are definitely much better than the scenarios put into the models which guide the banks on what an appropriate level of provisioning is. I don’t expect National Australia Bank (ASX: NAB), ANZ (ASX: ANZ) or Westpac (ASX: WBC) to announce special dividends or buybacks in May. It is too soon following the end of JobKeeper.

“But the banks are definitely holding more capital than required, so we expect it at some point. The Commonwealth Bank (ASX: CBA) in August could kick things off, depending on how the economic recovery goes,” Zaia said.

Zaia also thinks Suncorp is likely to lift its dividend payout, but in the second half of 2021. Based on better-than-expected earnings and a 65 per cent payout ratio, its first half 2021 interim dividend was meaningfully higher than the 10-cent dividend paid in second-half fiscal 2020. “We expect a 90 per cent payout on second-half earnings.” says Zaia.

Morningstar utilities analyst Adrian Atkins agrees that Spark is attractive for its yield. Spark is trading at a discount to its $2.50 fair value and its current price of $2.17, yielding 5.9 per cent, with CPI-linked growth likely to support the distributions in the medium term. AusNet offers a relatively attractive yield of 5.5 per cent, franked to 40 per cent, and “with modest growth potential”.

“Longer term, we expect stronger growth as rising bond yields push regulated returns on equity higher,” says Atkins in a research report.

According to UBS, Ausnet's and Spark's regulated revenues are set based on 10-year bond yields and were set by the regulator in September 2020 when bond yields were very low.  “If bond yields lift, this should see higher regulated revenues and possibly dividends.”

Doubts over sustainability of earnings

However, Investors Mutual’s Moore says investors shouldn’t assume the healthy earnings that some companies posted last year as a result of government stimulus payments, in the retail sector in particular, are sustainable going forward.

High iron ore prices are also unlikely to be sustained, “which has implications for a number of our large mining companies,” says Moore.

Investors are best placed investing in quality companies which possess a sustainable competitive advantage, such as a strong franchise, a track record of recurring earnings and companies which are underpinned by a strong balance sheet and management and are reasonably priced, Moore says.

“Sonic Healthcare (ASX: SHL), Nine Entertainment (ASX: NEC), and Metcash (ASX: MTS) are three companies that we believe will see good growth in their dividends in the next few years. Sonic should be able to continue to generate healthy dividends from deploying the significant cashflows it has earned from covid-19 testing into bolt-on acquisitions.

“Nine’s growth outlook is being driven by the continued strong progress of the company’s digital assets, which include the Stan streaming business and the Domain property listings business. Nine has a solid balance sheet, low debt, and is trading on around 15 times earnings, with an increased payout ratio or share buyback a possibility.”

“Metcash, like Sonic and Nine, has minimal debt after raising equity during the height of the covid crisis. The company’s growth outlook for dividends is now also strong … At its recent investor day, Metcash also flagged raising its payout ratio from 60 per cent to 70 per cent.”

is a Morningstar contributor.

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