News & Insights

Plato Insights: Dividend Bonanza

“The current market and political environment is creating a golden opportunity for yield investing”

Interest rates around the world, including Australia, have been falling recently. Where conventional wisdom one year ago was for rising rates, now expectations have factored in domestic rate cuts and falling yields over the next 3 years. Aussie 10-year government bonds are at all-time lows standing at 1.75%. This change in expectations suggests the global economy may be facing some headwinds over the short to medium term as business confidence, geopolitical risks and market conditions deteriorate. Fortunately, for investors, equity market yields remain attractive and have increased significantly in the first half of 2019.

The increase has been triggered by a raft of proposed tax changes from the ALP that will negatively impact the after-tax outcomes for many Australian investors should they be enacted.  Arguably the most controversial is the removal of cash refunds of franking credits about which Plato has written extensively in 2018[1].  This change is not grandfathered and results in an effective 30c in the dollar reduction in the value of fully franked dividends for tax-exempt investors (pension phase SMSFs and very low-income individuals) who will not be able to reclaim franking credits.  This proposed change is scheduled to occur on 1st July 2019 which has provided an incentive for Australian tax-paying companies to distribute franking credits on their balance sheet prior to this date so their tax-exempt investors can utilize them. This period may be looked back on in future years as a golden opportunity for yield investing.

During the February 2019 reporting season, a number of companies announced significantly increased or special dividends and Caltex announced a $260m off-market buyback that is due to complete in April 2019.  Overall, of the S&P/ASX 200 companies reporting during February, an impressive 78 companies increased their dividends compared with 24 companies who maintained their dividends and 22 who decreased dividends. The median increase was just 5%, but the value-weighted[2] average increase was a massive 56% reflecting the impact of a number of large companies who had significant dividend increases.

This has provided a dividend bonanza for investors during the first quarter of 2019 and Plato expects this to continue into the second quarter.  Arguably this process began in the final quarter of 2018 when Rio Tinto and BHP completed $2.6B and $7.3B off-market buybacks respectively, but we believe these were due to each business selling assets and returning the cash generated from these sales to shareholders rather than a desire to get ahead of any tax changes.

Some of the notable dividend changes are quoted in the table* below:

A few points are worth noting:

  1. BHP also paid a $7.3B special dividend in January 2019, increasing its dividends per share paid by 210%.
  2. A significant portion of this dividend windfall occurred in the resources sector which are taking advantage of commodity price increases whilst not undertaking significant investment in new or larger mines.
  3. Woolworths have also flagged plans to return up to $1.7B to investors, including an off-market buyback after the sale of its petrol business is finalised around the end of March.
  4. The financials and property sectors made up the majority of the dividend cuts and Telstra again cut its dividend, bringing the cut in its ordinary dividend (which was 5c in 1H2019) to 68% from 2yrs ago.

In order to benefit from this short-term windfall, one option is for investors and advisers to stay on top of the companies that are announcing and paying special dividends whilst avoiding any dividend traps. Alternatively, the Plato Australian Shares Income Fund is well placed to capture this windfall in a diversified, risk aware portfolio and is forecast to significantly lift its distribution in the June quarter taking its annualised gross yield (including franking credits) to over 14%! [3]

 

 

 


[1]Robbing Granny in the Name of Paul”, “Which superannuation funds may be affected by the ALP franking credit proposal”, “Which Individuals may be impacted by the ALP franking credit proposal”, and our submission to the Parliamentary Inquiry.
[2] We weighted each stock by its market capitalisation in order to calculate the average change across the market.
[3] This is calculated by using the actual and estimated (by Plato) gross distributions during FY19, divided by the unit prices at the beginning of each quarter.

Plato Investment Management Limited ABN 77120730136 AFSL 504616 (‘Plato’) believes the information contained is reliable, however no warranty is given as to its accuracy and persons relying on this information do so at their own risk. This communication is for general information only and was prepared for multiple distribution and does not take account of the specific investment objectives of individual recipients and it may not be appropriate in all circumstances. Persons relying on this information should do so in light of their specific investment objectives and financial situations. Any person considering action on the basis of this communication must seek individual advice relevant to their particular circumstances and investment objectives. Subject to any liability which cannot be excluded under the relevant laws, Plato and Pinnacle Fund Services Limited ABN 29 082 494 362 AFSL 238371 disclaim all liability to any person relying on the information contained in this communication in respect of any loss or damage (including consequential loss or damage), however caused, which may be suffered or arise directly or indirectly in respect of such information.
Any opinions or forecasts reflect the judgment and assumptions of Plato and its representatives on the basis of information at the date of publication and may later change without notice. Any projections contained in this presentation are estimates only and may not be realised in the future.  The information is not intended as a securities recommendation or statement of opinion intended to influence a person or persons in making a decision in relation to investment.
Unauthorised use, copying, distribution, replication, posting, transmitting, publication, display, or reproduction in whole or in part of the information contained in this document is prohibited without obtaining prior written permission from Plato. Plato and their associates may have interests in financial products mentioned in the presentation. Past performance is not a reliable indicator of future performance.