Is this the shape of things to come for some or most of our large group of Listed Investment Companies?
According to the annual profit report this week from Djerriwarrh Investments (DJW), lower dividend payments are going to be the order of the day in coming years for LICs as they get hit by weak or no dividend growth from the companies they invest in.
Djerriwarrh Investments is one of a group of LICs linked to the country’s biggest, Australian Foundation Investment Co (AFI), which is due to release its 2015-16 figures next week.
Analysts will be watching to see if the approach taken in this week’s profit report by Djerriwarrh is followed by AFIC and some of its other competitors, such as Argo investments and Milton Corp.
Mirrabooka Investments, also part of the AFIC stable, last week revealed an unchanged total dividend for the year of 10 cents a share, but trimmed its special payment to shareholders to 5 cents a share from 7 cents the previous year.
Djerriwarrh Investments is managed by the AFIC group and reported a 13% slide in net profit for the year to $40.7m for the last financial year, blaming lower or static dividends from its half billion dollars of so of listed investments. (Or as the company described it “remarkably divergent” equity market returns.)
As a result Djerriwarrh cut its final dividend to 14c a share, for a full-year payout of 24c compared with 26c last year.
Directors downgraded the outlook for next year’s total dividend to 20c per share with the board foreseeing a continued environment of “lower growth, lower dividend income and lower capital returns”.
Djerriwarrh’s $500 million portfolio, with franking credits, returned a negative 1.1% against a benchmark index return which gained 2.2%, after the group shunned investments in real estate trusts and gold stocks, which both did well in the year.
The decision to slash the dividend followed similar moves by some of its major investments, such as BHP Billiton, Woodside, QBE, ANZ, and Rio Tinto.
Djerriwarrh’s dividend had been held at 26c per share for nine years in a row, but the lower for longer mantra in many parts of the market (including corporate boardrooms on dividend policy) means resetting policy in Djerrwarrh’s – and 20 cents a share in 2016-17 it will be.
Directors told the ASX that "In recent years however capital growth in large cap stocks where Djerriwarrh’s option activities are focused, has been relatively flat. In particular, given this general lack of capital growth in the market over the last twelve months, there were no taxable realised gains produced this year whereas last year $25.8 million of after tax realised gains were generated.”
"In this context, the Board has undertaken a detailed review of the potential to maintain the current dividend going forward in what we assume will continue to be an environment of lower growth, lower dividend income and lower capital returns. Some important features that bear on this are:
"The recent large cuts in resource company dividends which we do not expect to be reversed in the foreseeable future.
"The cut in dividend by one of the four big banks and due to their relative high payout ratios, uncertainty as to the future dividend levels amongst the other major banks.
"High payout ratios generally amongst ASX listed companies which may be wound back to some degree in coming years
“Earnings from options being high at present due to high volatility, a feature which may not be sustained at this level in future years, and
“Extremely low interest rates.”
AFIC reports next Monday, July 25 and Argo releases its figures on August 8 – both will be watched to see if the lower dividend payout policy is catching.
The market took the news in its stride – the shares closed at $3.96 – last Friday they had closed at $4.16. That’s a fall of nearly 5%. The lower dividend will mean more stretched Price Earnings ratios (although LICs are more measured on their returns compared with the market).
But if dividends are lowered across the board then share prices will eventually weaken because cash returns to shareholders will fall.
