Iron ore miners are the new banks': New roadmap for dividends on the ASX

By Alex Druce and Dominic Powell

September 5, 2020 — 12.10am

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Many of the income-hungry investors in Australia's biggest companies were fearing a dividend drought this year, as COVID-19 ravaged corporate earnings. But in the end, things didn't turn out too badly.

"It was still one of the worst reporting seasons on record," says Perpetual’s head of multi-asset investment strategy Matthew Sherwood. "[But] revenue growth ended up being ahead of street estimates, costs were a bit mixed, and earnings growth also was just a little bit better than expected. And of course that has flow-through effects to dividends."

Analysts and fundies alike say the dividend game has changedCREDIT:BLOOMBERG

To be clear, there will not be a dividend bonanza this year. According to CommSec dividends fell by 36 per cent compared to a year ago and only 69 per cent of companies elected to pay a return to shareholders compared to a 20 year average of 86 per cent.

But strong commodity prices, pandemic-packed pantries, and rivers of government support still helped many big-name companies clear the low bar of pessimistic predictions to deliver dividend beats.

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As the pandemic continues to rage, the question investors are now faced with is whether this resilience is sustainable or not.

Miners are the new banks

One thing analysts and fund managers agree on is that the dividend game in Australia has changed. Both in how much to expect in your pocket, and where it’s going to come from.

“Traditionally Australian investors have relied on the big four banks for income, but this paradigm has now well and truly shifted,” Plato Investment managing director Dr Don Hamson said this week. “In fact right now I would say iron ore miners are the new banks.”

UBS says dividends per share were revised up 3.3 per cent over the reporting season - though this largely reflected the depressed forecasts, rather than a rising payout.

“It’s still down a lot, let’s not shy away from that, but better than expectations heading into earnings season,” says Australian Foundation Investment Company's Mark Freeman.

Banks blasted, miners minted

Aside from Commonwealth Bank’s better than expected payout of 98 cents - down from $2.31 a year ago - the big lenders largely underwhelmed on the income front.

ANZ's deferred interim dividend of 25 cents a share was cut from 80 cents, and NAB’s 30 cent payout was down from 83 cents.

But Westpac cut its dividend altogether. This alone, according to Janus Henderson's Global Dividend Index Report, accounted for a 60 per cent decline in Asian payouts over the quarter.

“Banks have also become more cautious in their lending book, particularly in a market where housing is falling, and perhaps have had less collateral then what they realised before February,” says Perpetual’s Sherwood. "So, as a result, they’re carrying more capital in the balance sheet.

“But if not all of these mortgagees on welfare find employment again then, at some stage, there is a risk that bad and doubtful debts will increase.

“And at that stage, that brings risks of not only lower dividends but also more capital raisings.”

The baton for dividends has been passed from financial giants to iron ore and gold miners sitting atop mountainous commodity prices.

Twiggy Forrest’s iron ore juggernaut Fortescue Metals delivered a $1 final dividend - up from 23 cents - for a total $2.25 billion as it posted a record profit on soaring iron ore prices.

Sector titans BHP and Rio Tinto also proved a relative bounty for investors. BHP’s reduced payout received a mixed reception from analysts but still came in at US55 cents a share. Rio Tinto’s interim dividend of $US1.55 a share was a 3 per cent higher than a year ago.