Dividends in the financial sector could be cut by 41% in the next year, according to UBS, with total ASX 200 dividends expected to fall by $21.7 billion, more than during the Global Financial Crisis (GFC).
The investment bank said it expected overall dividends could fall around 30% in the next year with the biggest losses seen in the financial and energy space, greater than during the GFC when they fell 28%. However, in an extreme downside scenario where these two sectors paid zero dividends, overall dividends could fall by as much as 60%.
“In recessions, dividends typically fall by 0.4x the fall in earnings but we think the coming decline in dividend per share (DPS) will be greater due to the potential for banks and energy sectors to remove dividends,” UBS said.
“The 30% decline in DPS under our scenario is in line greater than the GFC where DPS fell 28%. Our estimate of a 30% decline implies ASX 200 dividends fall by $21.7 billion to $50.7 billion. The GFC’s 28% decline saw dividends fall by $10.5 billion to $44.9 billion in 2008.
“The risk is that COVID-19 impacts the economy and companies for longer than expected. In this case, we could see some companies who tried to maintain DPS via higher payout ratios forced to cut DPS next year. Delayed DPS cuts would also normalise payout ratios but may catch the market by surprise.”
Banks and insurers have already been warned by the Australian Prudential Regulatory Authority that they should defer dividend payments or issue them at a materially-reduced level.
“APRA expects that ADIs and insurers will seriously consider deferring decisions on the appropriate level of dividends until the outlook is clearer. However, where a board is confident that they are able to approve a dividend before this, on the basis of robust stress-testing results that have been discussed with APRA, this should nevertheless be at a materially-reduced level,” UBS said.
UBS said stocks where the dividend risks were higher included Challenger, QBE, ANZ, NAB and Westpac. ANZ, Challenger, HUB24, Perpetual, Pinnacle, Pendal, Suncorp and Westpac had all already announced dividend forecasts by 20% or more.
Meanwhile, Commonwealth Bank, Macquarie Group and Magellan were less of a risk.
