The February reporting season saw a continuation of the recent themes of modest earnings growth across the market combined with healthy levels of dividends. In addition to the ordinary dividends, many companies also rewarded investors by paying out special dividends. This eagerness to return capital to investors reflects positively on the financial strength of corporate Australia, with low debt levels giving companies the flexibility to pay high levels of dividends.
At EIGA’s investment manager Perennial Value, we place a very high level of importance on the underlying financial strength of the companies we invest in, viewing a company’s balance sheet as being similar to the foundations of a house. A strong balance sheet underpins the ability of the company to carry on its operations, take advantage of growth opportunities and – importantly – pay consistent and growing dividends to investors.
Looking at our EIGA portfolio, 29 of our 34 stock holdings reported results during the period. Results were generally well-received with the EIGA portfolio delivering a total return, including franking credits of +7.2% for the month. In terms of dividends, 80% of the stocks that reported increased or maintained their dividends compared to last year, with a median increase of 4%.
Some of the notable dividend outcomes included resource holdings
- BHP which paid a US$1.09 per share special dividend,
- Rio Tinto which paid a US$2.43 per share special dividend,
- Woodside Petroleum, which lifted its ordinary dividend by +47%. The resource stocks currently have very low levels of debt and ongoing generous dividends are likely.
Other strong dividend outcomes were provided by
- Wesfarmers, which paid a $1.00 per share special dividend,
- Magellan Financial Group which lifted its dividend +66% and announced an intention to pay out 90-95% of its net profit going forward,
- Star Entertainment, which lifted its interim dividend +40%
A further factor likely to be driving higher levels of dividends is Labor’s policy on franking credits.
Labor has proposed, should they come to power, passing legislation eliminating the ability of investors in pension phase to claim refunds for franking credits. While a lot of water has to flow under the bridge for this to occur, companies are prudently trying to release as many franking credits as possible ahead of the election. While the ultimate outcome is impossible to predict, we believe that the proposal is highly inequitable and unfairly disadvantages self-managed super funds compared to other types of investment vehicles and some classes of investors compared to others. As such, the proposed changes may have a very difficult time being ratified by the Senate in their current form.
In terms of the outlook, we expect ongoing growth in dividends across the market, underpinned by modest earnings growth. Further, the trend towards additional capital returns is set to continue, with Woolworths indicating that it will return up to $1.7bn to shareholders after completing the sale of its Petrol business, Caltex announcing a $260m off-market buy-back and Suncorp committing to return $600m following the sale of its life business.
As such, EIGA’s diversified portfolio of quality, dividend-paying Australian shares can continue to play an important part in meeting investors’ income needs, by providing a growing, tax-effective income stream. We further believe that the current low interest rate environment further highlights the attractiveness of financially-sound, high-yielding equities.