25 October 2020
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Have we seen the worst of dividend cuts?

Andrew Zenonos
18 September 2020

What happened during reporting season?

In many ways, FY20 reporting season was one of the most closely watched in recent memory as investors attempted to understand the true impact of the COVID-19 pandemic on company fundamentals. Going into the end of the financial year, expectations for earnings had been slashed significantly due to the level of uncertainty that remained in the outlook for the economy. While there was stock level volatility and divergence (as always), reporting season for FY20 was largely better than expected. Although FY21 earnings expectations were downgraded, the ASX300 returned 3.05% for the month of August.

Results were better than expected at the aggregate level, though many companies did not give guidance for FY21 due to the uncertainty that still looms over the next 12 months in the economy. Companies may provide updates during AGMs in Q4; however, it is difficult to know if additional clarity will be available at that point in time.

There were some notable themes at the sector level. The consumer discretionary sector was a notable space for earnings upgrades as the ‘work from home’ theme drove strong increases in sales. JB Hi Fi and Harvey Norman were beneficiaries of this, outperforming by 9.5% and 15.8% respectively through August. Whilst bank results were mostly in line with expectations, FY21 earnings for the sector were downgraded on the back of net interest margin pressures, as well as uncertainty for the economy once fiscal stimulus has ended or is tapered significantly. Resources companies remain resilient and reported earnings upgrades in aggregate. Iron ore miners remain well bid as the commodity market dynamics remain favourable.

What happened to dividend expectations?

Due to the level of uncertainty that remains for the coming 12 months, and the hesitation from companies to give guidance, it is not surprising that we did not see much in terms of news flow around dividends relative to expectations. At the end of July, APRA eased restrictions around paying dividends for banks, however payout ratios for Authorised Deposit-Taking Institutions (ADIs) will be maintained below 50% for this year. Whilst this is a small positive, the outlook for bank dividends remains significantly below what investors have come to expect. ANZ, CBA and NAB announced dividends, however Westpac confirmed that an interim dividend will not be paid. Once factoring in reporting season, approximately 35% of companies in the ASX200 have deferred, cancelled, suspended, or declared no final dividend. The outlook for dividends at the aggregate market level remains subdued and shrouded in uncertainty, i.e. not dissimilar to the environment before reporting season. In saying that however, alongside the thematic that earnings were better than feared, it appears that the outlook for dividends has potentially seen a bottom – at least for now.

Source: Bloomberg

The expected dividend yield for the Australian market, which has historically been viewed as a high dividend yield market, is now around 3%. This is significantly lower than the 20 year average dividend yield of 4.3%.

How did our ETFs perform?

Through August, both our Russell Investments High Dividend Australian Shares ETF (RDV) and our Russell Investments Responsible Investment ETF (RARI) outperformed relative to the broad market.

RDV benefitted from exposure to retail and the ‘work from home’ theme noted above via overweight positions in Harvey Norman and JB Hi-Fi. Exposure to a number of companies that reported ‘better than feared’ results also added value, particularly in tourism related parts of the market. Star Entertainment and Flight Centre outperformed the broad market on the back of their results.

RARI also benefitted from exposure to strong retail names such as Super Retail Group and Premier Investments, as well as ‘better than feared’ results in Qantas and Stockland Group. Rio Tinto is excluded from RARI’s holdings due to its involvement in (and risk attributable to) mining activities. This benefited performance over the month of August, as controversy related to the company’s blasting of indigenous sites, weighed on the share price. This caused significant shareholder backlash and exposed some questionable, if not poor, governance practices within the company. Subsequently, the CEO and a number of senior executives have departed. We continue to see strong demand for ESG related products and growing concern around active ownership and governance. Russell Investments recently received ‘Leadership’ status from RIAA (Responsible Investment Association Australasia) and is well placed to deliver broad based responsible investing solutions to our clients.

IMPORTANT INFORMATION

Issued by Russell Investment Management Ltd ABN 53 068 338 974, AFS License 247185 (RIM). This communication provides general information only and has not been prepared having regard to your objectives, financial situation or needs. Before making an investment decision, you need to consider whether this information is appropriate to your objectives, financial situation and needs. Any potential investor should consider the latest Product Disclosure Statement (PDS) for the Russell Investments High Dividend Australian Shares ETF (RDV) in deciding whether to acquire, or to continue to hold, units in the ETF. Only persons who have been who have been authorised as trading participants under the Australian Securities Exchange (ASX) Operating Rules can apply for units in the ETF through the latest PDS. Investors who are not Authorised Participants looking to acquire units in the ETF cannot invest through the PDS but may purchase units on the ASX. Please consult your stockbroker or financial adviser.

The Russell Australia High Dividend Index (the “FRC Index”) is a trademark of Frank Russell Company (“FRC”) and has been licensed for use by Russell Investment Management Ltd. RDV is not in any way sponsored, endorsed, sold or promoted by FRC, FTSE Russell or the London Stock Exchange Group companies (“LSEG”) (together the “Licensor Parties”) and none of the Licensor Parties make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to (i) the results to be obtained from the use of the FRC Index (upon which RDV is based), (ii) the figure at which the FRC Indexes is said to stand at any particular time on any particular day or otherwise, or (iii) the suitability of the FRC Indexes for the purpose to which it is being put in connection with RDV. None of the Licensor Parties have provided or will provide any financial or investment advice or recommendation in relation to the FRC Index to Russell Investment Management Ltd or to its clients. The FRC Index is calculated by FRC or its agent. None of the Licensor Parties shall be (a) liable (whether in negligence or otherwise) to any person for any error in the FRC Index or (b) under any obligation to advise any person of any error therein.

Copyright © Russell Investments 2020. All rights reserved. This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an “as is” basis without warranty.

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