Miners unseat Telstra as the new dividend stars

Australian investors are set to share in a record $18.9 billion dividend bonanza this month as the big miners have emerged as the market’s new dividend stars, offsetting more miserly payouts from embattled blue chips like AMP and Telstra.

Bell Potter’s Richard Coppleson finds that for the year ruled off June 30, 2018, total dividends increased 4.1 per cent to $81.5 billion. The final tranche of dividends will be paid out to investors this month and next. September’s calendar of payments – including BHP Billiton’s US63¢ or 88.5¢ a share on September 25 and Commonwealth Bank’s $2.31 a share on September 28 – are ahead 16 per cent on September 2017.

Mr Coppleson argues that cyclical mining stocks will find a new audience among income investors because “the market is unsure about the medium-term prospects for the banks and Telstra has disappointed retail income lovers”.

Although investors will have to be cautious around the commodity cycle, if the miners are able to maintain their dividends for a few years at current levels that will win back investors. In the last 18 years, BHP has only cut its dividend four times, although on the last occasion it was a necessarily savage event.

For example, targeting a 6 per cent fully franked yield, Rio Tinto would find support in a sell-off at $65 (it closed at $71.32 on Tuesday) and BHP at 5.5 per cent fully franked would pique interest at $28 (last trade at $31.20).

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Another remarkable aspect of the earnings season was that although the payout ratio – the proportion of earnings paid out as dividends – was slightly lower at 91 per cent, overall dividends were higher. Five of the six biggest increases came from miners, and BHP’s uplift was worth $1 billion alone.

“Companies are looking to capital management as opposed to growth. There’s a greater propensity for companies to return capital to shareholders,” said Katana fund manager Romano Sala Tenna. “There’s been the odd share buyback and special dividend. We haven’t seen bank dividends grow and they are the biggest dividend payers.”

Three of the big four banks have September 30 balance dates. Shareholders see those dividends in November.

“Companies are right to consider whether they should pay out dividends or invest for growth. Over the last decade or so I don’t think that they considered that enough. They need to consider the return on invested capital from each scenario and pick the one that gives the best return.

“If you can find a genuine growth story, it will outdo a company throwing off cash any day of the week,” the fund manager said.

But such stocks are not typical of the ASX’s top 20 where industrials and banks are concerned.

“I think there’s a level of appeasement going on as well. Some companies believe the safest option is to give money back to shareholders. If you make an acquisition, there’s a risk you could fail. Companies are also getting disrupted so quickly; they are spending money just to maintain profits.”

Mr Sala Tenna concluded that “it’s hard to find options to grow”.

MST Marquee senior research analyst Hasan Tevfik said earnings season was characterised by 2018-19 earnings downgrades, dividend upgrades, and increased capex.

“There’s a clear increase in payout expectations,” he said. “Companies are a bit more comfortable. It was a strong revenue environment.”

But he has previously argued that those revenue gains are being squandered as costs bite.

The biggest trend over the past ten years has been higher payout ratios and lower growth, which has led some companies to pay for higher dividends in capital losses.

In Australia, a lot of self-managed super funds are already in pension phase and prominently represented on the registers of retail investor-oriented stocks. For example, Telstra discloses that 45.85 per cent of shareholders account for 2.9 per cent of the register where those investors own 1,000 shares or less in a parcel.

In cutting its dividend, which was signalled to the market prior to the 2018 annual results, Telstra said that it needed to increase capital expenditure to execute its transformation in a competitive market for telco services.

Rio Tinto famously departed from its progressive dividend policy, and BHP did the same, almost three years ago, averting a trap that led the miners to follow through on dividends they could not reasonably afford during a depressed commodity price cycle, and putting their credit ratings at risk. The old mentality meant the dividend could not fall.

They have since moved to a more conventional ratio-based strategy. In BHP’s case it is a minimum of 50 per cent of underlying profit earned, and for Rio, 40 to 60 per cent of underlying earnings through the cycle.

Banks are in the process of spinning off assets which could provide an opportunity to re-base dividends lower, according to some market analysts.

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