Doug Goodwille from Kayne Anderson speaks to Drew Meredith from The Inside Network on market thinkers.
While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
Upside surprise for banking and resource dividends
Company dividends have been on a quick and steady path to recovery from pandemic lows, with the potential for further “upside surprise” in certain sectors and stocks, according to Ausbil Investment Management.
Portfolio manager for the Ausbil Active Dividend Income Fund, Michael Price, said “The outlook for dividends is now showing a rebound towards previous levels, which we know will be welcome news to investors in a low-income environment. Looking forward, we expect equities to deliver attractive dividends, with yields outstripping those from alternative income sources.”
Australia has long been a market characterised by high dividend payout ratios, largely driven by the big banks. Last year APRA regulated the big four banks to cut their dividends to conserve capital due to the COVID-19 pandemic; not that it was required, as boards had already sought to hoard as much capital as they could. Self-retirees and super fund members were dealt a rather large blow.
Banks have always been a popular selection for income due to their high after-tax yield, usually as high as 8 per cent, at a time when interest rates are close to nothing.
However Price says “with growth in deposits, a buoyant mortgage lending market and strong balance sheets, we see further recovery in bank dividends occurring over the coming year, albeit with lower payout ratios than before the pandemic.”
Fast forward to today, and the fallout from Covid-19 wasn’t as bad as expected. Many were expecting high debt, high unemployment, and lower sales. Earnings hit hard from the pandemic and dividends decimated. And so, investors shifted their reliance on income from the big banks to stocks that stood to benefit from Covid-19.
These were primarily the commodity-related stocks such as BHP, RIO and FMG. During April 2020 to March 2021, iron ore companies became the top dividend payers with 16 per cent of total dividends paid versus 12 per cent for the banks. From April 2021 to March 2022, iron ore company’s paid out 20 per cent versus 19 per cent from the big banks.
The banks are back driven by better-than-expected earnings post COVID-19. Westpac (ASX: WBC) for example, posted a HY cash profit of $3.5bn up 256 per cent from the prior corresponding period with an increased dividend of 58c.
However, the bank dividend recovery is still not back to pre-pandemic levels. Should the banks and iron ore miners continue with the same momentum, the next year of dividends should shoot the lights out. According to the AFR who spoke to portfolio manager at Tyndall Asset Management, Michael Maughan, “forecasts have S&P/ASX 200 dividends surging 22 per cent in the 2021 financial year.
While materials stocks account for more than half of those forecasts, thanks to a 43 per cent increase, financials, industrials and real estate investment trusts (REITs) are also all growing by more than 20 per cent.”
The banks have come out of Covid-19 well capitalised to the point where the big four are able to consider increased dividend payouts. Bank shares prices have rebounded strongly and is expected to be reflected in their dividend policy.
“Looking forward, we believe there is potential for upside surprise from both the banking and resources sectors, with plenty of valuable franking credits to be had for investors. However, an active approach remains important in order to identify those companies that can produce sustainable and growing dividend income.” Mr Price concluded.
