Why reporting season could be a ‘dividend recession’

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August 03 2020
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The COVID-19 pandemic is likely to see dividends to shareholders slashed, hurting retirees and those relying on dividend income, an investment bank states.

Investment bank UBS has warned investors that the Australian market is expected to deliver a 21 per cent fall in earnings per share (EPS), the equal worst of the global financial crisis.

“One of the key negative surprises in 2020 has been the hit to dividends. Based on consensus expectations, dividends per share (DPS) across the market is expected to fall a record 39 per cent in FY20, far worse than the 20 per cent fall seen during the GFC,” the UBS report stated.

While partly driven by a fall in earnings, the significant reduction in estimated dividend payout ratios from 77 per cent in FY19 to 64 per cent in FY20 has been surprising.

“We think companies that can continue to pay, or even grow, their dividends are likely to outperform as investors seek stable sources of income. More than 35 per cent of companies reporting in Aug-20 are not expected to pay a dividend (compared to less than 10 per cent of companies that reported in Aug-19),” the UBS report said.

“However, UBS analysts still expect 30 companies to maintain or grow their DPS in Aug-20.”

This follows a financial regulator ordering the big banks to cut their dividends in response to the COVID-19 crisis.

The Australian Prudential Regulation Authority (APRA) has updated its capital management guidance for banks and insurers, in particular easing restrictions around paying dividends as institutions continue to manage the disruption caused by COVID-19.

APRA chair Wayne Byres previously said the updated guidance balanced the need for banks and insurers to keep supporting households and businesses, while also maintaining a prudent approach in the face of a very sharp and severe economic contraction.

“[The] announcement strikes a balance in recognising the strength of the financial system, while at the same time acknowledging the difficult path ahead,” Mr Byres said.

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

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