2019 was a bonanza for dividends, mainly due to Bill Shorten’s crazy proposal to stop the refunding in cash of surplus franking credits. Ahead of the May election, companies declared special dividends, supersized their ordinary dividends or brought forward the payment of dividends from the 19/20 financial year to the 18/19 financial year. Some implemented off-market share buybacks, which involve the payment of a turbo-charged franked dividend.

This year is going to be more challenging because it is unlikely we will see many special dividends or off-market share buybacks. There are also two other factors at play. Firstly, profit growth is low single-digit and lags the growth in overall share prices, notwithstanding the coronavirus scare. This means that it is harder for companies to maintain the same effective dividend yield. The other factor relates to pressure from institutional investors, economists and analysts for companies to adopt “sustainable” dividend payout ratios.

In an environment of ultra-low interest rates, investors are increasingly dependent on share dividends for income, so changes to payout ratios or other influences are of concern. Questions by investors such as “what will happen to my dividends in 2020?” and “what  increase, if any, can I expect?” abound. 

Obviously, answers to these questions depend on the composition of the portfolio, so to help, let’s look at data from the just wrapped-up company earnings season and dividend projections on a sector-by-sector and stock-by-stock basis.

The February company earnings season is the time when about 75% of companies provide detailed half-year or full-year financial reports. According to AMP Capital who monitor individual company results, it was a season of “mixed “ outcomes.

While 53% of companies saw their profits rise from a year ago, this was down on the long-term norm of 65% of all companies. The number surprising on the upside (“beats”) was  38%, the same as the number of “misses” but down on the long-term average of “beats” of 44%. Overall, expectations for earnings growth in 19/20 came in at a weak 2.3%.

On the dividend front, 50% of companies increased their dividend (down from the long- term norm of 62%), while 22% reduced their dividend and 28% were unchanged. Big increases were recorded by the major miners on the back of the booming iron ore price, but this trend is unlikely to continue. Dividend increases were small reflecting a focus by companies on the sustainability of payout ratios.

To quantify the increase in dividends, let’s consider the outlook for each sector and on a stock-by-stock basis. Detailed below are the 11 industry sectors and the major stocks that make up each sector. The sectors are arranged in descending order of market weight. For example, financials, with a weight in the S&P/ASX 200 of 29.7% is first, utilities with a weight of 1.9% is last.

1. Financials

Overall trend:        Down. Some pressure on banks to cut dividends

Stocks:                  CBA     No change to interim. Expected unchanged 431c for full year

                              ANZ     Expect unchanged 160c for full year

                              NAB     Expect unchanged 160c for full year 

                              WBC    Likely to be cut to 160c for full year (down from 174c)

                              SUN     Interim unchanged at 26c. Final likely to be cut

                              BEN     Interim div cut from 35c to 31c

                              BOQ    Final div cut from 38c to 31c

                              MQG   Interim up to $2.50 from $2.15. Final could be reduced

                              QBE     Final down 1c to 27c. Expect higher for 2020 year

                              IAG      Interim cut from 12c to 10c

                              MPL     Interim unchanged at 5.7c  

2. Materials

Overall trend:        Higher now, but expect cuts in second half 2020 and into 2021

Stocks:                  BHP     Interim div up 18% to US65c (A$0.97)

                              RIO      Final div up 28% to US$2.31 (A$3.50)

FMG    Interim up from 60c to 76c

AMC    Dividends now quarterly, largely unchanged

NCM    Interim unchanged at US7.5c

3. Healthcare

Overall trend:        Higher

Stocks:                  CSL      Interim dividend up 12% from US85c to US95c

                              RHC     Interim dividend up from 60c to 62,5c

                              RMD    Dividends quarterly, increasing gradually

                              SHL      Interim dividend up 3% from 33c to 34c

4. Industrials

Overall trend:        Marginally higher

Stocks:                  BXB      Interim dividend unchanged at US9c

                              TCL      FY20 distribution expected to be 62c, up from 59c

                              SYD      Up 4% in CY19. CY20 likely to be flat to very small increase

                              AZJ       Interim up from 11.4c to 13.7c

CIM     Interim up 1c to 71c

SEK      Interim cut from 24c to 13c

5. Real Estate

Overall trend:        Higher, low to mid single digit increase

Stocks:                  GMG    Guided to unchanged FY20 distribution

                              SCG      Guided to 3% distribution increase for CY20

                              DXS      Guided to 5.5% distribution increase for FY20

                              MGR    Guided to 5% distribution increase for FY20

                              SGP      Guided to unchanged FY20 distribution

6. Consumer Discretionary

Overall trend:        Marginally higher

Stocks:                  WES     Up 5c to 105c in total when Coles included

                              ALL      Brokers expect 65c for FY20, up 16% on FY19

                              TAH     Interim unchanged at 11c

                              CWN    Interim unchanged at 30c

                              HVN     Interim unchanged at 12c

7. Consumer Staples

Overall trend:        Marginally higher

Stocks:                  WOW  Interim div up 2c from 45c to 47c

                              COL      Maiden interim div 30c. See WES above

                              A2M    No dividend

                              CCL      Final dividend unchanged at 26c

                              TWE     Interim up 2c to 20c, but TWE has withdrawn profit guidance

8. Energy

Overall trend:        Flat to down

Stocks:                  WPL     FY19 dividend US91c, down 37% from US144c in FY18

                              STO      FY19 dividend US11c, up 13% from US9.7c in FY18

                              ORG     Interim dividend up from 10c to 15c

                              OSH     FY19 dividend US10.5c, down 10% from US9.5c in FY18

9. Communication Services

Overall trend:        Flat, with risk for Telstra from FY22

Stocks:                  TLS       FY20 div expected to be unchanged at 16c. Possible cut in FY22

                              REA      Interim unchanged at 55c

10. Information Technology

Overall trend:        Very few companies pay dividends.

Stocks:                  CPU     Interim up from 21c to 23c

                              LNK      Interim down from 8c to 6.5c

11. Utilities

Overall trend:        Power utilities down, others up by around 5%

Stocks:                  AGL     Interim down 15% to 47c (from 55c)

                              APA     Guided to FY20 distribution of 50c, up 6%

                              AST      Interim 5.1c, up from 4.9c     

Healthcare, real estate, consumer staples and consumer discretionary sectors are set to pay higher dividends in 2020, while the biggest sector, financials, and energy, are down. The other sectors are flat. Dividends from the large resource companies are higher in the first half of 2020, but are likely to be cut in the second half.

In summary, dividends in aggregate for 2020 should increase over 2019 at around 3% to 5%. This assumes that the impact of the coronavirus scare on economic activity (and any flow-on to company earnings) is relatively contained. Looking ahead to 2021, when the impact of lower commodity prices will be felt, the outlook is less rosy and starts with a flat base.