Australian investors shouldn’t expect a repeat of the mammoth payouts they received in the 2021 financial year, with post-COVID market volatility and weaker iron ore prices likely to make companies more cautious on dividends.
With research from asset manager Janus Henderson this month highlighting that Australian payouts grew four times faster than the rest of the world, hitting a record of $41.9 billion in the third quarter of 2021, experts are warning of a more subdued outlook for the 2022 financial year.
The dividend bonanza has been driven predominantly by miners and banking giants, with Melbourne-headquartered iron ore giant BHP set to dole out close to $19 billion to Australian investors in 2021.
But Morningstar head of equity research, Peter Warnes, told the Sydney Morning Herald and The Age that companies are likely to hang onto their cash reserves in fiscal 2022, as the pandemic’s aftershocks ripple through the global economy.
“I do think 2022 is going to be a pretty tough year. I don’t think you’re going to get double-digit returns,” Mr Warnes said. “I’d be watching carefully what I’m doing in terms of the market.”
The recent drop in the iron ore price, which provided BHP, Rio Tinto and Fortescue such a buffer during the pandemic, will further hamstring these companies’ payouts in 2022.
The price of iron ore, which hit an all-time high of $US229.50 in May 2021, has more than halved since then and is now sitting around $US94.
“The resources companies will be the big payers again [in 2022], albeit the collapse in the iron ore price is going to be a meaningful damper,” said Mr Warnes.
Meanwhile, the banking sector will recover its confidence in 2022 and move back towards pre-COVID payout ratios of 70-75 per cent. This fell to around 50 per cent during 2021, he added.
Mr Warnes expects major players in the retail sector that benefited from the pandemic – JB Hi-Fi and Harvey Norman, for instance – to “pay strong dividends” in 2022.
Tribeca Investment Partners portfolio manager Jun Bei Liu agreed that 2022 payouts would be overall lower than what was seen in 2021, but would still be a “very, very good outcome” compared to the rest of the world.
“The retail sector is one I want to point to for potential dividend surprises on the upside,” Ms Liu said.
“So far, we haven’t seen significant cash return from retailers – we’ve seen some – but there will be more … We think by February-March, you should start seeing retailers talking about it, and by August next year we’ll see pretty strong dividend returns.”
As the world struggles to reset to a ‘new normal’ after the COVID-19 crisis of 2020 and 2021, many companies will remain wary of volatility in the market in the form of ongoing supply chain disruptions.
While Ms Liu doesn’t expect any nasty surprises in 2022, any escalation in geopolitical tensions will ripple through the market and make investors cautious.
“The minute the market becomes more volatile, corporations will try to hold on to cash. They won’t pay it out,” Ms Liu said. “It’s only prudent. So, this is something that will weigh on corporates’ intention of paying out dividends.”
On the other side of the spectrum, Mr Warnes said the travel, hospitality and events industry were still “on their knees” and highly unlikely to be issuing substantial payouts in 2022.
An increasing focus on sustainability, and investor and shareholder pressure for companies to make net zero pledges, will also impact investor dividends, he added – though this will be a very long-term trend, unlikely to be felt in 2022 or even in the next five years.
Companies must spend millions and in some cases trillions of dollars to undergo a ‘green’ transition, Mr Warnes said. “It costs money to do it. It’s going to have inflationary effects, and the cost of doing business is going to increase.
“If that can’t be passed onto customers, then someone’s going to carry the bag.”
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Source: Thanks smh.com