New regulators’ policies aimed at encouraging firms to retain capital combined with lower earnings across many sectors may have far-reaching implications for retirees as well as companies and investment managers, according to a Realindex study.
The research looked at how central banks and regulators have initiated policies to constrain dividend payments by financial institutions.
Further to that, Realindex’s modelling suggested that 60% of the ASX 200 benchmark’s total return was due to dividends and for financials, that rises to more than 70% of the total return (including dividends and buybacks).
According to David Walsh, Realindex’s head of investments, moves to limit dividends could both reduce investor incomes and affect valuations.
“We know that dividend payments are an important component of returns to shareholders, especially retirees. They are also the chief source of franking credits in Australia, and so they are a key part of the attraction for investors,” he commented.
“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.”
At the end of April, the weighted average consensus of dividend per shares downgrades was -25% for Australia and -17.3% globally, with downward revisions led by energy, transport and banks.
“The extent of dividend cancellation or withdrawal is not clear yet, but many dividend forecast downgrades have already appeared in analyst forecasts and there are some sectors that look quite at-risk,” Walsh said.
Additionally, Australia might be more severely impacted from COVID-19 than other developed markets as a decline in aggregate demand from China was likely to affect earnings in the materials sector, at least in the short term and, according to Realindex’ modelling, the retail segment of the real estate was especially at risk of distress.
Walsh stressed that dividends acted as a signalling mechanism for firms, with strong consistent dividend payout ratios and payments being a way for investors to understand the confidence that management had in the business.
In addition, companies that catered to the demands of investors by paying dividends could attract a premium for their shares.
“Significant changes to this behaviour could see changes in valuations going forward,” he said.
“A critical point is that it is not clear how long this change will continue for. 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. However, if this represents a longer term change or permanent shift, then the implications may be very different. Only time will tell.”