Home / Investing / Dividend boon may end in 2023 after mining resources peak

Global equity dividends have had a stellar run as company profits remained resilient, even through the pandemic. But with volatility peaking and economic activity set to slow, 2023 may mark a turning point.

The August reporting season has been a very profitable ones for shareholders and company profits are sitting at a five-year high, helping to support dividend payouts. However, an expected slowdown in earnings growth is likely to weigh on dividend payouts in 2023 as the tougher economic environment reduces many companies’ cashflows.

CommSec estimates that around $42 billion will be paid to shareholders by S&P/ASX 200 companies from late August through to October. That compares with around $36 billion in dividend payouts in the February 2022 reporting period and the reporting season in August 2021, when the current composition of ASX 200 companies paid out over $41 billion dividends.

Aggregate profits announced in the 2022 August reporting season were up by 56.3 per cent (excluding BHP, up 36.5 per cent). Close to 63 per cent of companies lifted profits over the year, compared to the long-term average of 60 per cent, according to CommSec data.

“Currently profits are supported by the strong job market and higher wages, supporting consumer spending, greater pass-through of costs from business to consumers and high demand and prices for Australian commodities,” says Craig James, chief economist with CommSec (pictured, centre).

However, weaker earnings growth is expected next year as the Australian economy slows, which could reduce cashflows and profits. “Company profit margins are likely to be squeezed by higher costs, destocking and discounting due to elevated inventory levels as supply chain disruptions ease,” James says.

“The issues that dominated over the last six months will continue to dominate over the next 6 to 12 months. So, for investors, it will simply be a case of analysing which companies respond best to the challenges.”

Resources lift may fade

A big lift to dividend payouts this August reporting season has come from the resources sector, with BHP notably delivering a record dividend for corporate Australia, says Dermot Ryan, portfolio manager with Renaissance Equity Income (pictured, left). However, with share markets remaining volatile and economic activity set to slow across the globe, this could weigh on commodity prices and dividend payouts in 2023.

“We think mining sector dividends have peaked as unit costs rise,” Ryan says. “Overall, we think investors should be looking outside the top 20 stocks where dividend fundamentals are much more appealing in terms of growth, resilience and yield.”

The S&P/ASX200 Index is delivering an aggregate 6.3 per cent, including franking, but about half of those payments are coming from the largest seven stocks, that is, the big four banks and three iron ore miners, and both sectors facing a slowdown in demand as interest rates rise, taking overall payouts lower, according to Ryan.

“The market is expecting dividends to be flat to slightly declining at an aggregate over the coming year, but the risks are to the downside with falling margins and increased volatility incentivises board conservatism,” he says.

“For those willing to look outside the ASX-20 there is some strong dividend growth to be had, with companies who have held back dividends through this post-pandemic period. We also think that most areas of corporate Australia have excellent balance sheets at this point and that provides a lot of downside protection.”

Strong dividend payouts worldwide

Globally, rising dividend payouts highlight how well corporate profitability has held up this year even as households and businesses globally face soaring inflation soars and fears of a global recession grow. In total, global dividend payments reached US$544.8 billion ($825.5 billion) in the second quarter, according to a report from Janus Henderson, which has calculated that dividends are up 11.3 per cent on a headline basis year-on-year after companies slashed dividends during the COVID-19 pandemic; 94 per cent of companies in the Janus Henderson Global Dividend Index increased or maintained their dividends.

Janus Henderson has modestly upgraded its annual forecast for 2022 dividend payments, which it now expects to reach US$1.56 trillion this year, as the chart below shows. This translates into headline growth of 5.8 per cent year-over-year, equivalent to an 8.5 per cent increase on an underlying basis.

Matt Peron, director of research at Janus Henderson (pictured, right), says that in 2023 any slowdown in economic growth will likely have a larger impact on dividend payments outside the US. “Within the US, dividend growth has shown remarkable resilience across market cycles, as companies have demonstrated they are more likely to cut back on share buybacks than trim dividend payments.”