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Retirees hold breath on bank dividends

Glenn Freeman  |  15 Apr 2020Text size  Decrease  Increase  |  
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Franking credits were the topic du jour a year ago and they're again on investors' minds now as some of the highest-yielding payers of franked dividends—Australia's big four banks—look set to slash their 2020 payouts.

Labor's policy to oppose cash refunds for excess franking credits was cited as a key reason for its shock loss to the Coalition in last year's federal election.

Twelve-months on, now the question is whether the government should force banks to scrap dividends—as has happened in the US, Europe and New Zealand.

The banking regulator, the Australian Prudential Regulation Authority, last week suggested Australia's banks consider suspending their dividends until there was more certainty about the impact of the coronavirus pandemic.

The banks are yet to make a call on their dividends for this year, but they're almost certain to be lower if not scrapped entirely, according to Morningstar banks analyst Nathan Zaia.

Retirees most exposed

ANZ Bank (ASX: ANZ) will be the first to make a call on dividends, National Australia Bank (ASX: NAB) and Westpac (ASX: WBC) will make that call in the coming weeks, starting with ANZ when it announces its interim earnings at the end of April. It will be followed by National Australia Bank and Westpac.

Australia’s largest lender, the Commonwealth Bank, has a different calendar year, paying dividends in March and September.

If the big banks do cut or suspend dividends, the impact will be most pronounced among older Australians who missed out on compulsory super and instead rely on share dividends to fund their retirement.

"It might come as a shock to shareholders who've become accustomed to getting distributions, but dividends are by no means guaranteed," Morningstar banks analyst Nathan Zaia says.

"We're expecting banks to slash the dividend payout ratio to 50 per cent, but in saying that, it could mean no interim dividend is paid at all, as a worst-case scenario."

Is capital raising on the cards?

To help protect bank dividends, some in the funds industry support the Australian Prudential Regulation Authority's suggestion they use underwritten dividend re-investment plans.

Dividend re-investment plans, or DRPs, are a form of capital management where companies can raise cash by issuing more stock to existing shareholders.

In short, an investor is reinvesting their money back into the company rather than taking a cash payment.

Morningstar's Zaia thinks it unlikely the banks will use DRPs, and cautions against it.

"APRA has already said ‘we think banks should hold off on making a decision on dividends’, and their main priority is preserving capital, so I don't think that decision would come from them."

He says banks need to cut their dividend payout ratios "but whether they need to go all the way to zero really depends on how severe this downturn is.”

"And our preference is not to go down the underwritten DRP path, because at the end of the day you'd be issuing shares at a very low price and that's dilutive."

But Don Hamson, managing director of fund manager Plato Investment Management, notes that many of Australia’s traditional income stocks have DRPs.

“These companies can choose to underwrite those plans, which effectively means that new shares will be issued matching the dollar value of all the dividends that they pay,” he says.

“For all those investors electing cash rather than the DRP, the company will still issue new shares which a broker will sell on market during the DRP pricing period. This allows the company to completely preserve its capital as well as paying dividends to those who rely on the income to make ends meet.”

The importance of dividends to Australians is highlighted by Anton Tagliaferro, founder of Australian equities manager Investors Mutual.

Investment returns come from two components:

  • Capital growth—how much company earnings change over time
  • Dividend income—payments to shareholders.

Dividend Reinvestment

Source: Calculated using IRESS

As the above table shows, almost half of the returns from the Australian share market in the past 20 and 40 years have come from dividends.

is senior editor for Morningstar Australia

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