Strong commodity prices and an easing of the regulatory cap on bank dividends are expected to underpin a revival in payments this year that may also bolster Australia’s stock market.
Payouts from firms on the S&P/ASX 200 index are forecast to rise 15% this year, before returning close to pre-coronavirus levels in 2022, according to data compiled by Bloomberg. After the benchmark sagged last year as firms slashed or withheld dividends, a payment rebound among the heaviest-weighted sectors on Australia’s benchmark could boost the gauge’s appeal.
Known for its traditionally high dividend yield, 2020’s payment reduction was “part of the reason why Australian equities underperformed for a big part of the year,” said Jun Bei Liu, a fund manager at Tribeca Investment Partners. “Those dividend yields will come back, and in the low bond yield and low interest rate environment, it looks incredibly, incredibly attractive.”
Stocks that pay regular dividends and have lower levels of volatility should also perform well in the current record-low interest rate environment, according to UBS Group AG. The income trade could take off if the U.S. reaches herd immunity this year, which would dampen some of the popular Covid-19 investment trends, the analysts added.
Australia Dividend Rebound Seems to Lag Earnings: Morgan Stanley
Banks and miners, which make up the bulk of the Australian market, are set to see the largest increase in payments, according to Bloomberg data. Financials comprise about 29% of the benchmark stock index, while materials shares account for 20%. The S&P/ASX 200 fell 0.1% in early trading after closing Monday close to a one-year high.
Lenders are forecast to raise payments by about a third. Australia & New Zealand Banking Group Ltd. is projected to post the biggest increase this year among all regular dividend-paying companies on the nation’s benchmark, the data show.
The expected surge in dividends from banks, which are widely held by retail investors for their steady stream of payouts, comes after Australia’s regulator in December lifted a cap on payments. In July, the Australian Prudential Regulation Authority limited dividends to 50% of earnings, easing recommendations issued in April that lenders defer returns during the health crisis.
Still, forecasts aren’t as cheery elsewhere in the finance sector. QBE Insurance Group Ltd. is forecast to have the steepest payment cut this year, Bloomberg data show. The insurer last month said its allowance for Covid-19 claims will increase after a ruling in a U.K. business interruption case.
Miners are projected to boost payments by 29% as prices stay buoyant for commodities like iron ore. Producers should report strong yields during the February earnings season on positive cashflow and low debt, with the possibility of special dividends, according to Citigroup Inc.
A Well-Managed Virus Response Underpins Australian Profit Season
Other sectors are in for more cuts this year. Energy, one of the worst performers during the pandemic, is poised to trim payments by a third amid concerns over fuel demand.
Despite projections for a 17% reduction among communication services firms, Telstra Corp. is expected to maintain payments this year. The telco, which has the largest shareholder base on the benchmark, could see a “significant” re-rating as it focuses on returning cash to investors, according to Goldman Sachs.
(Adds market performance in fifth paragraph.)
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