Australia can expect to see a severe cut in dividends over the next 12 months as result of COVID-19, although iron ore miners and telcos are expected to remain resilient.
As companies entered the final financial quarter, markets were considering which sectors would be able to retain their dividends in the face of a volatile stockmarket.
Don Hamson, managing director of Plato Investment Management, said: “Our current expectation when taking into account all the information currently available on the COVID-19 pandemic is an overall 30% dividend cut across Australian equities over the next 12 months.
“This was expected to result in a gross yield of 5% for Australian equities, but this was still higher than returns for cash.”
Dermot Ryan, Australian equities manager, at AMP Capital said the cut could be even higher at a third of total dividends, worse than during the global financial crisis.
“It is not beyond the bounds of possibility that dividends may be cut as much as a third in the market, which would make the impact worse than the GFC.”
Sectors potentially able to withstand the cuts would be iron ore miners such as BHP Billiton, Rio Tinto and Fortescue Metals, telcos like Telstra and consumer staples.
“The dividend cuts will be very stock specific and sector specific and dividend traps are about to become a lot more prevalent,” Hamson said.
“We believe iron ore miners are at the lower end of the dividend cut risk spectrum. Expected stimulus from China will require iron ore and there’s been supply issues in India and Africa which has supported prices.”
Ryan said the ability of miners, which have historically paid out large dividends, to retain dividends in this tough environment would depend on commodity prices and the price of the Australian dollar which was currently at a multi-year low.
“Miners have been paying large dividends, which is welcome, but it is important to remember many companies in this sector have dividend policies where they pay a percentage of profits out as dividends.
“This means if commodity prices were to fall due to say reduced global demand this year, then dividends would naturally adjust lower with profits.”
He also agreed telcos would do well in light of schools and offices moving to remote working and people spending increased amounts of time at home.
“We expect telecommunications and service providers to that sector to do well as households have started to increase their mobile and broadband packages and carriers start their 5G capex spending.”
Looking at those companies which would suffer, Hamson said banks were particularly at risk.
“Significant dividend cuts are likely from the banking sector and it is our belief that smaller banks will be hurt more than larger banks, due to thinner margins and narrower funding avenues,” he said.
Share price performance of Fortescue Metals, BHP Billiton and Rio Tinto v ASX 200 since start of 2020 to 31 March, 2020
