Dividend cutters to beware of

Financial journalist and commentator on 3AW and Sky Business
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Dividend income from shares has been a massive story of the 2010s, driven by the biggest phenomenon of Australian investment this century: the staggering growth of self-managed superannuation funds. The demand from SMSFs for franked dividend income has become a huge influence on company management.

SMSFs are estimated to own more than 16% of the Australian share market – and companies are very keen to keep their dividend-hungry investor base happy.

This means that these days, the major listed companies will fight tooth and nail to keep their dividends sacrosanct.

Dividends also fall

But not all can manage to always lift their dividend – in fact, that belief is as erroneous, and dangerous, as the belief that property prices never fall.

Even the big four banks, long the darlings of income seekers, suffered in 2009 as bad debt provisions affected the ability to pay dividends. Commonwealth Bank cut its payout by 14%, Westpac reduced its dividend by 18%, and shareholders in ANZ and National Australia Bank suffered 25% dividend cuts. Macquarie Group shareholders had to stomach a 46% dividend fall, while Suncorp slashed its dividend by 63% as it also struggled with bad debts.

Even worse were the stocks, including Sigma Pharmaceutical, James Hardie Industries, Australian Agricultural Group, Qantas and Transpacific, that ceased payments altogether.

With balance sheets having been rebuilt since the GFC, the market takes a very dim view of the cutting of a dividend – but still companies find themselves forced to do it.

There are some serial offenders – or those flirting with becoming serial – for which investors must keep watch.

The watch list

QBE Insurance Group (QBE), one of the ASX’s most successful global stocks, is poised on this cusp. In August 2012 QBE shocked shareholders by cutting its interim dividend by 32%, from 62 cents to 40 cents, and followed that in February 2013 with a final dividend down 40%, from 25 cents to 10 cents.

For 2012 (QBE uses the calendar year as its financial year), the total dividend fell by 42%, from 87 cents to 50 cents.

Then, in 2013, the August interim halved to 20 cents: not even a two-cent improvement in the final dividend could stop a 36% slide in QBE’s full-year dividend, from 50 cents to 32 cents.

The consensus of analysts’ forecasts expects the insurance heavyweight to lift its 2014 dividend to 45.2 cents, and boost it further in 2015, to 49 cents. For shareholders who have been in the red in terms of total return (dividends plus capital growth) for five years, this turnaround can’t come quickly enough – because neither contributor to total return has been pulling its weight.

ASX Limited (ASX) has also been an erratic dividend performer lately. Its FY12 final dividend (down 7.9 cents to 85.1 cents), FY13 interim dividend (down 4.9 cents to 87.9 cents) and FY14 final dividend (down 2.8 cents) were all backward steps, until the FY14 interim (up 0.3 cents to 88.2 cents) ended this slump – permanently, ASX investors will be hoping. The analysts’ consensus has ASX lifting the full-year FY14 dividend to 179.4 cents from 170.2 cents, and increasing it again in FY15, to 193.1 cents.

Building products group Boral (BLD) has also been patchy, ever since FY09, when its interim dividend slumped from 17 cents to 7.5 cents, and its final dividend dropped from 17 cents to 5.5 cents. FY2012 saw another slump, when the final dividend halved to 3.5 cents: this was followed by the FY13 interim slipping by one-third, to 5 cents. But Boral appears to have stopped the rot, with strong lifts in the FY13 final dividend and the FY14 interim payment.

Shareholders in financial services giant AMP Limited (AMP) also have reason to be displeased with the dividend trend, with the full-year pay-out declining in five of the last six financial (calendar) years, from 48 cents in FY08 to half that figure in FY13. Again, the consensus implies recovery for the AMP dividend, to 25.9 cents this year and 27.8 cents in 2015, but shareholders are entitled to be wary.

Building products group CSR is another to have hit recent dividend potholes, with its FY13 interim dividend the first in three not to fall, and its FY13 final dividend down more than two-thirds. The full-year FY13 dividend slumped to 5.1 cents, from 13 cents the year before: the analysts’ consensus has CSR more than doubling its FY14 payout.

Fuel refiner and marketer Caltex Australia (CTX) will also be looking for a turnaround in FY14 after three years of falling dividends – from 60 cents in FY10 to 34 cents in FY13, but the market is backing that view, with the analysts’ consensus projecting a lift to 42.1 cents a share in FY14 and a more substantial rise in FY15, to 71 cents.

Two years ago, in FY12, engineering and property services provider UGL paid its shareholders 70 cents a share, fully franked. Last year that slipped to 39 cents a share, 34 cents in an interim dividend franked to 50%, and five cents in an unfranked final dividend. Earlier this year UGL – which has flagged the potential demerger of its engineering business from its property services business DTZ – failed to pay an interim dividend, and analysts do not expect a final dividend, either. The analysts’ consensus does expect a full-year payout of 19.6 cents a share in FY15, but that is still a long way short of what some UGL shareholders may have come to expect.

And that is the point on the share market – you can’t “expect” anything when it comes to share dividends, because they rely mostly on profits.

This caveat even encompasses the banks, and Telstra. Although the analysts’ consensus projections are for healthy dividend lifts in FY15, just remember that that dividend income levels can never come with a guarantee.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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