Systematic equities manager Realindex has made the case in a new research paper, where it has assessed themes affecting dividends in the current market.
Based on its modelling, Realindex has indicated that 60 per cent of the ASX 200 benchmark’s total return is due to dividends. For financial institutions, the proportion rises to more than 70 per cent of the total return (including dividends and buybacks).
In a bid to shore up capital and maintain liquidity in a COVID-19-shaken economy, APRA told banks and insurers at the start of April to defer, reduce or cancel dividends, without specifying a time period.
Since then, Westpac and ANZ decided to defer their dividends, while NAB reduced its payout by almost two thirds.
Dr David Walsh, head of investments at Realindex said moves to limit dividends could both reduce investor incomes and affect valuations.
He believes dividends in Australia will be more severely affected from COVID-19 than in other developed markets.
“We know that dividend payments are an important component of returns to shareholders, especially retirees,” Dr Walsh said.
“They are also the chief source of franking credits in Australia, and so they are a key part of the attraction for investors.
“The potential enforced cancellation of dividends for certain financial institutions will not only reduce the income investors are expecting, they will likely look to move capital to companies that do pay dividends. This could drive up the prices of stocks such as Telstra, Wesfarmers or Coles.”
Realindex portfolio modelling showed that at the end of April, weighted average consensus of dividend per shares downgrades was -25 per cent for Australia and -17.3 per cent globally, with downward revisions led by energy, transport and banks.
Realindex, which is part of First Sentier, is currently in the process of reassessing its investment processes, rethinking relying on dividends as a key measure for company performance. It expects other investment managers are doing likewise.
The white paper has noted that corporate behaviour can be driven by investor demand for dividends, with Dr Walsh calling payouts a “signalling mechanism for firms”.
“Strong consistent dividend payout ratios and payments are a way for investors to understand the confidence that management has in the business,” he said.
“In addition, companies that cater to the demands of investors by paying dividends can attract a premium for their shares. Significant changes to this behaviour could see changes in valuations going forward.”
But it all depends on how long the change will continue.
“If it is a temporary change, many investment processes and market and corporate behaviour will probably not move markedly when averaged over a longer period,” Dr Walsh said.
“However, if this represents a longer-term change or permanent shift, then the implications may be very different. Only time will tell.”
He added the extent of dividend cancellation or withdrawal is not clear yet, but many forecast downgrades have appeared and a number of sectors appear at risk.
“A decline in aggregate demand from China is likely to affect earnings in the materials sector, at least in the short-term. Our modelling also shows real estate – especially retail – is at risk of distress,” Dr Walsh said.
“Additionally, the low oil price will test the resilience of many energy companies, and we assume that this will lead to dividends being at risk, especially for global portfolios.”
