Australia’s Dividend Rebound Bonanza

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After the dividend drought of 2020 which saw dividends fall -40%, investors are ideally positioned to capitalise on the commodity price boom supporting mining dividends and the dividend recovery being experienced within banks and more broadly across the market.

-Dividend growth of around 40% looks highly achievable in 2021
-Resurgent commodity prices are boosting mining dividends
-Fortescue Metals Group doubled its distribution to became Oz's largest dividend payer
-More big payouts expected from miners in coming months
-Banks expected to restore dividends to around 70%

By Mark Story

After the dividend drought experienced by Australian shareholders in 2020, Janus Henderson believes a stronger-than-expected first quarter of distributions points to a major revival, with dividend growth of around 40% looking highly achievable, taking payouts to $70.9bn.

Despite the Janus Henderson’s index of dividends ending the quarter at 171.3, its lowest level since 2017, the company sees clear signals Australian dividends will rebound to close pre-pandemic 2019 levels by the end of the year.

While on an underlying basis, Australian dividends were flat year-on-year at -0.2%, the result actually ensured Australia was among the better performing comparable countries. In Australian dollars, total payouts rose 1.6% (including special dividends) to $20.5bn.

However, if adjusted for changes in Janus Henderson’s index that saw hard-hit companies like Sydney Airport ((SYD)) and Scentre Group ((SCG)) drop out of the global top 1,200, dividends rose 7.4%. Much of this can be attributed to the commodities boom driving increased mining dividends.

Driving renewed optimism are improving economic conditions globally, the world-wide rollout of covid vaccines, plus underlying strength in commodity prices – all of which are expected to push the local share market higher. With greater confidence about the future, local companies are expected to distribute more of their profits to shareholders, with Janus Henderson forecasting payouts to reach 85% of 2019 levels this year.

Australian companies were among better performing dividend payers compared to rest of the world in the first quarter of 2021. Janus Henderson believes Australia’s hybrid economy is well placed to take advantage of the recent surge in commodity prices, and strong industrial production in China. 

Miners, banks and retailers leading the charge

Due in part in part to the commodities boom driving higher mining dividends, Australian dividends were in the first quarter among the better performing among comparable countries. Janus Henderson reminds investors one of the key drivers of last year’s dividend drought is the Australian share market’s heavy concentration towards banks and mining stocks, relative to other global markets which are much more diversified.

For example, in 2019 and 2020, the top ten payers in Janus Henderson’s index contributed almost four fifths (78%) of Australian dividends – and the pandemic did nothing to disrupt that pattern. Janus Henderson believes Australia’s heavy dependence on a few very large banks and mining companies proved costly to income investors in 2020, and explains why Australian dividends were among the world’s hardest hit.

While banks are rapidly catching up, with resurgent commodity prices driving significant growth in payments, boosted by large one-off special dividends, mining companies really stood out in the first quarter. Soaring prices clearly boosted miners’ fortunes during the first half of calendar 2021, with iron ore, copper and other base metals reaching new highs on the back of strong demand from China and other countries. This is resulting in record levels of free cash flow for the miners.

While Rio Tinto ((RIO)) upped its payout by half in April, BHP Group’s ((BHP)) mining payouts (inclusive of special dividends) jumped 60% year-on-year in Australian dollars, with further increases signalled to arrive later in calendar year 2021. But the standout miner was Fortescue Metals Group ((FMG)) which, having virtually doubled its distribution, became Australia’s largest payer in the first quarter.

Despite the good news from the mining sector, just over half the Australian companies in Janus Henderson’s index made year-on-year reductions, though this was a smaller proportion than in recent quarters. Nevertheless, Janus Henderson expects to see more big payouts from miners in the coming months, providing a significant boost to the Australian dividend total.

While this will be influenced by exchange-rate factors given commodities are priced in US dollars, Janus Henderson expects mining dividends to be up by around 60% for the calendar year.

Having been interrupted by the pandemic, plus in many cases regulatory restrictions, dividends from financial companies were boosted with a number of companies restarting dividends, albeit at lower levels. The biggest negative impact came from Commonwealth Bank of Australia ((CBA)), which made a much smaller cut in the first quarter than it did in the third quarter of 2020. This delivered an unseasonal boost to the sector in the first quarter, with Janus Henderson now expecting banks to restore dividends to around 70% of their 2019 level with the easing of Reserve Bank limits.

“With Australia’s dividend payers still so heavily concentrated, investors will be well-placed to take advantage of the commodity price boom supporting mining dividends and the dividend recovery of the big banks,” urged Jane Shoemake, client portfolio manager for global equity income at Janus Henderson Investors.

While some companies will find it harder to either grow their dividends substantially or pay one at all, Janus Henderson also expects healthy increases from defensive retailers like Coles ((COL)) and Woolworths ((WOW)).

Think globally for income

In the first quarter of 2021, less than one company in five (18%) globally made year-on-year cuts to dividends, far fewer than a third (34%) that have cut over the last year.

By comparison over half the Australian companies in Janus Henderson’s index cut year-on-year dividends in the first quarter, highlighting the need for Australian investors to think globally for income. Janus Henderson reminds investors the slow-growing Australian bank dividends have meant that income growth in Australia has lagged far behind the rest of the world, even before the pandemic struck.

As a result, Janus Henderson believes Australia’s slower dividend growth profile, combined with the country’s concentration risk means the benefits of global diversification are clear to see.

Meantime, while global companies that suspended payouts appear keen to restart, Janus Henderson expects dividends to be more volatile than in a normal year, albeit with significantly fewer downside risks. As a result, the company has upgraded its 2021 global dividend forecast to $1.78trn, which is equivalent to an underlying rebound of 7.3%.

Globally, dividends were -1.7% lower than the same period last year, a far more modest decline than in any of the preceding three quarters, all of which saw double-digit falls. Dividends from Asia-Pacific ex-Japan were -6.0% lower on an underlying basis, with the -16.9% fall in Hong Kong making a significant impact. This meant the index of Asia Pacific’s dividends fell to 190.6.

While there is still a lot of uncertainty for company profits given the uneven nature of vaccine rollouts globally, Janus Henderson also expects share buybacks to return as a use for surplus cash. This in turn will influence how much is returned via dividends, especially in the US.

While the timing and magnitude of individual company payouts is going to be unusually uneven, Shoemake observes considerably less downside risk to payouts this year than previously anticipated.

“Despite this uncertainty, we are more optimistic given that the first quarter was undoubtedly better than expected,” noted Shoemake. “We are now more confident that companies are willing and able to pay dividends, especially those companies that have traded well.”

Canada which has a similar dependence on banking and energy dividends to Australia accounted for three fifths (62%) and the UK likewise saw 67% of its dividends paid by the top 10 in 2020. By contrast, at the global level the 10 biggest payers made up just a tenth of world dividends in each of the last two years.

Despite experiencing a similar dividend decline in 2020 to Australia, Janus Henderson expects the bounce-back in the UK to be much more limited. Even with big special dividends, payouts over there are expected to be around a third lower than in 2019.

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