An investment manager has predicted ASX 200 payouts could be cut by a third or more during the next 12 months, with the coronavirus outbreak to potentially cause a larger cut to dividends than the global financial crisis.
AMP Capital has made the forecast, saying while shareholders will suffer, the cuts will help companies survive the long period of lockdowns and set them up for recovery.
Revenues in the Australian economy are drying up as the tightened restrictions on going outside amid the pandemic keep consumers and workers at home.
The majority of dividends announced in February have been paid, there have been high levels of franking and up until now, it had been a good financial year for payouts, AMP Capital reported.
Banks and REITs are the main sectors left to pay large dividends before the end of the financial year but both sectors are expected to cut their payouts sharply in the second quarter, due to the knock-on effect of rent and mortgage abatements. The sectors will need capital to service their own debts as they carry high debt loads.
The virus outbreak and lockdown response has also dramatically slowed economic activity in sectors such as travel and aviation. The consumer impact has spread to retail, media and gaming, which are unlikely to pay any more dividends this year, AMP Capital Australian equities portfolio manager Dermot Ryan said.
“Keeping precious working capital is key as companies move to preserve cash by temporarily standing down workers, negotiating rental abatements with landlords and reducing outgoings,” Mr Ryan said.
“It is only reasonable that dividends are crimped to preserve cash too, particularly as debt costs for non-investment grade companies spike.”
Companies that have strong balance sheets may still have the ability to pay dividends, but AMP Capital has recommended management to make “prudent decisions” in allocating that cash and to prioritise the long-term operations of their company.
Buybacks have not been spared, with both Qantas and Viva Energy announcing buybacks only to later cancel them.
However, while dividends lag with activity, capital raisings may be a “happy hunting ground for new equity investments”. Mr Ryan has said investors should look for companies with fixed balance sheets and set up for an upswing in profits and dividends ahead.
“Remember this is transitory and the crisis will pass and profits and dividends will bounce back,” Mr Ryan said.
“Shareholders could consider valuing companies on a mid-cycle three-year basis so they can calmly look through the short-term pause to find companies that can grow their dividends in normal times.”
The crisis will favour long-term investors, he said, particularly if they’re able to select equities with “pockets of real value in the market”.
AMP Capital has favoured investment in essential services, supermarkets, infrastructure, packaging and hospitals and aged care.
It also expects telecommunications and service providers to do well as households increase their mobile and broadband packages and carriers start their 5G capex spending.
“With the Australian dollar at a multi-year low and uncertainty globally, we think our energy, mining and even wine industries will benefit from this new currency tailwind,” Mr Ryan commented.
Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth.
Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio.
You can contact her on [email protected].
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