According to Reserve Bank Deputy Governor Phil Lowe, the trend of companies returning more cash to shareholders through higher dividends and share buybacks could be self-defeating, leading investors and savers to a situation where their returns are lower because of the current global trend to low interest rates. His warning should have special resonance in Australia.
His warning came as the quarterly report from the Henderson Global Dividend Index yesterday showed a fall in global dividends in the March quarter, but a sharp rise in payouts in Australia.
Dr Lowe told a Sydney finance conference yesterday that there were dangers in the trend for companies to return funds to shareholders.
"These firms are effectively saying to their shareholders, ‘here, you manage the money, as we do not have investment opportunities that satisfy our internal rate of return.’ In many cases, shareholders have welcomed this, seeing it as a disciplined approach to capital management,” Dr Lowe told the conference..
"The difficulty is that if the majority of firms act in this way, shareholders in aggregate get left holding the cash. And, on that cash, they earn very low rates of return – almost certainly lower than the rate of return that would, on average, be earned if that cash were invested by businesses in real assets.
“This is really just another way of saying that if the appetite for investment is low, savers, in the end, will get low returns on their savings,” he said.
It’s the old question – who is better placed to get the highest returns from cash – companies or individual investors. It is usually not a big deal when interest rates are at more normal levels, but as Dr Lowe pointed out in his speech, these are not normal times. And it’s shareholders of all sizes who are hit – the big funds and the small holders.
The big funds have some protection because they can reinvest more easily (and generate gains to offset the low rates on cash holdings). But that takes money and transaction costs.
But despite the size of the shareholder, in a market where yields are falling and income producing shares are being bid up, reinvesting the returned cash can only buy fewer shares (that is one point in favour of dividend reinvestment plans).
Small investors are worst placed of all. If they need the money for income, they have to accept low returns from term or other deposits. if they buy shares, they face the same problems as big investors – chasing good shares at rising prices (as we saw with the huge run up in the banks until recently).
Many small investors seem to understand this instinctively and opt for dividend reinvestment, if they can afford to do so.
According to the Henderson report, global dividends dropped by 6.3% in the March quarter to a total of $US218 billion. Almost half of this came from the US where companies paid out $US99.4 billion.
(Vodafone made a $US26 billion special dividend payment late last year after its deal to sell its share of the US mobile phone joint venture back to Verizon earlier in the year. That’s why dividends in the UK in the first quarter fell sharply.)
Looking to the rest of the year, Henderson cut forecast for this year to $US1.13 trillion, down from $US1.167 trillion a year ago.
The fastest growing dividends in the Asia-Pacific region (up 11.7%) were from Australia, which experienced an underlying growth of 21.5% – a total first quarter dividend of $US7.65 billion, followed by Hong Kong with $US3.85 billion and Singapore with $US0.91 billion.
Australia’s biggest dividend payouts came from Amcor, BHP Billiton, Transurban and Woodside Petroleum.
Woodside is cutting its payouts this year because of the lower oil price. BHP spun off South32, which listed yesterday, but is committed to a “progressive” dividend policy.
