By Chris Walker,
, July 2009
For many investors, retirees and those not receiving a regular pay packet in particular, share dividends are more important than share prices.
As long as their companies keep going and pay regular dividends – off which the recipients live – they’re happy.
To these investors, capital growth is cream, only to be skimmed off for some special purpose. The main game is income.
The problem with dividends is they aren’t guaranteed.
They are usually paid to investors out of a company’s net profits, and the level of dividend payout – how many cents from each dollar of profit an investor receives – is determined by the company board. So if profitability declines, or the board is uncertain about the company’s position, dividends can be cut or, under dire conditions, not paid at all.
Substantially cutting or eliminating dividends is a serious step for a company, not one taken lightly, as it signals trouble within and can lead to loss of market confidence, share price falls and investor anger.
Although the market has risen dramatically since its March lows (The S&P/ASX 200 Index closed up 30% at June 12 from its March 10 low of 3120), and our economy narrowly escaped the recession label, many economists predict slow or no economic growth for the rest of 2009 and possibly into next year, and that company earnings will remain under pressure. So dividend payouts will also be in the firing line.
How do investors find companies unlikely to slash dividends?
Russell McKimm, senior client adviser at Patersons Securities, says: “Investors firstly should be looking for companies that are giving strong guidance about their earnings and their dividends. This is the easiest way to get an indication of what to expect.”
This information is in the public domain, readily accessible through the media, websites, brokers and from the companies.
“Next, investors need to look for companies in industries they believe have some protection from a downturn in the market. In the retail sector, for example, it would make more sense to look for companies servicing the lower, essential-goods end rather than those operating at higher price, higher discretionary spending levels.
“This makes companies like Woolworths and Metcash favourites with people because they feel in these tough times that company earnings, and therefore their dividends, are going to be protected.”
McKimm says another factor to check is the level of debt. This has been a killer for plenty of businesses, especially in the banking sector in the US and Europe, and has led to many capital raisings here in Australia this year in an effort to repair battered balance sheets (and dividends).
Angus Geddes, the chief executive at Fat Prophets, nominates a company’s ability to cover its interest obligations as a No. 1 priority. “A company with low interest cover [profits divided by interest costs] is going to be very much at risk in terms of dividend payment if anything happens to its profits,” he says. “Dividends are the first thing to take a hit under these circumstances.”
Geddes says investors can find out what a company’s interest cover is from its annual report. Alternatively, ask the company or a broker. Geddes also advises checking a company’s capital acquisitions program. Acquisitions may be planned to be funded from retained profits, rather than from raising equity, which will reduce the pot available for dividends to investors.
Finally, Geddes suggests looking at a company’s assets. Where asset write-downs do occur, dividend reductions are likely to follow.
He also advises looking at the dividend payments record and recommends investors choose those companies that have an uninterrupted history of paying dividends.
In Geddes’ opinion, the companies that are likely to continue paying reasonable dividends include Westfield, Telstra, BHP Billiton and the Big Four banks.
He believes dividends from ANZ, CBA, NAB and Westpac will rise next year.
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