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Should the big 4 banks pay dividends during COVID-19?
The big four banks should heed APRA’s warnings as well as support shareholders through a dividends reinvestment plan, an industry expert has urged.
Should the big 4 banks pay dividends during COVID-19?
The big four banks should heed APRA’s warnings as well as support shareholders through a dividends reinvestment plan, an industry expert has urged.
The call follows a recommendation from APRA to the big four banks to not pay dividends during the COVID-19 pandemic, which is likely to heavily impact investors requiring dividends to live off.
In a letter, APRA asked the banks to “limit discretionary capital distributions” and consider “prudent reductions in dividends”, but stopped short of blocking payouts to shareholders. APRA urged the companies to defer decisions on dividends until the outlook was clearer, and said any payments should be at a “materially reduced level”.
Plato’s managing director, Dr Don Hamson, said underwritten dividend reinvestment plans (DRPs) is a solution that can help address concerns about the ability of lenders to maintain capacity while paying dividends.
“We know many of Australia’s traditional income stocks have DRPs. These companies can choose to underwrite those plans, which effectively means that new shares will be issued matching the dollar value of all the dividends that they pay,” said Dr Hamson.
“For all those investors electing cash rather than the DRP, the company will still issue new shares, which a broker will sell on market during the DRP pricing period. This allows the company to completely preserve its capital as well as paying dividends to those who rely on the income to make ends meet,” Dr Hamson said.
While highlighting that APRA has acted prudently to protect the big four banks, he encourages a dividend reinvestment plan as it will ensure investors who need the income aren’t hung out to dry.
“Destroying the major income stream of thousands of Australians, many of whom are retirees, will put further strain on the economy, which we believe will fall into a deep recession in the June quarter of 2020,” Dr Hamson concluded.
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