THE trickle of companies flagging cuts to their dividend will turn into a flood during the February reporting season as dwindling profits force companies to consider conserving funds, leading investors say.
Heavily indebted companies are most likely to seek to retain earnings in an effort to minimise exposure to the towering cost of debt, as well as satisfy the market's current antipathy towards companies with high gearing.
And even companies that persist with substantial payouts are likely to seek to recapture some of the returns paid out in the form of dividend reinvestment plans, which are set for a resurgence.
Last week, Macquarie Media and Stockland became the latest two companies to slash payouts. Macquarie Media, which owns regional radio and television stations, will cut its interim dividend by more than 80 per cent, using the cash saved to buy back up to half the shares it has on issue.
For Stockland, a dive in earnings linked with falling house prices prompted the 34 per cent cut in payouts.
A housing slump, this time in the US, prompted James Hardie Industries to scrap its first-half dividend altogether.
A decision to cut dividends can be particularly tough for companies with a high proportion of retail investors, many of whom have come to expect a regular payout.
Among those companies are the banks, which Austock senior client adviser Michael Heffernan believes are unlikely to cut dividends after their injection of cash from investors in recent multibillion-dollar capital raisings.
The notable exception is the Queensland-based Suncorp, which flagged a possible cut at its November annual meeting.
"It really depends on the company that you're talking about," Mr Heffernan said. "Ones that are heavily oriented to the retail investor, and they are the banks, they are Telstra, for example … they're the ones that ought to only cut dividends as a very last resort."
Mr Heffernan suggested that companies at the discretionary end of retail spending were likely to be "in the gun" for cuts, with Billabong International and Harvey Norman likely candidates.
He also cited media companies Ten Network, Seven Network and Consolidated Media Holdings as being likely to join Fairfax Media, owner of The Age, in cutting dividends.
Capital conservation is also an idea whose time has come for many heavily leveraged companies, including the swathe of financial engineers such as Babcock & Brown and Octaviar, which have had near-death experiences.
"A lot of highly indebted companies are just glad to be alive rather than looking at whether they're going to be paying any dividends or not," Mr Heffernan said.
One consequence of share prices falling but dividends remaining intact — so far, at least — is that dividend yields have skyrocketed, backing the argument that cuts to dividends will merely return yields to their previous level.
It is an argument challenged by Eley Griffiths Group portfolio manager Brian Eley, who said the high yields were illusory.
"For example, company A was trading at $1 and a 10 per cent yield and is now trading at 40¢ and a notional 25 per cent yield, and the directors are saying 'well, that's ridiculous, we can't be trading on a 25 per cent yield'," he said.
"What they miss is that the only people who get a 25 per cent yield are those coming in today. People who paid $1 for their shares six or 12 months ago are still entitled to the yield they thought they were going to get. Just because the nominal yield looks awry doesn't mean it shouldn't be paid if it can be paid."
Mr Eley said his attitude was "if you can pay a dividend, you should" and that the market was unlikely to be sympathetic to companies that wound back distributions.
"You don't have to be an investor in any one particular stock, so if anyone shows any signs of weakness and cracks, they will get the same sort of treatment that they would have at any other time."
Investor relations expert David Perry, from Value Enhancement Management, earlier this month put together a "how-to" guide for companies intending to reduce dividends but hoping to keep shareholders on side.
The first step is to announce that the company is reviewing its policy, the second is to speak to a cross-section of shareholders, and then finally to announce the cut to the dividend.
When dividends are cut, Mr Perry suggests making it clear that the frugal payout policy is likely to extend for 12 to 18 months, meaning full dividends may not be restored until the full-year reporting season in 2010.
But for many companies, the pill is sometimes too bitter, no matter how thick the sugar coating.
"One company I was advising, I suggested they should do it," Mr Perry told BusinessDay. "And they said, 'no, we're not going to do it', and effectively the reason they're not going to do it is they have a couple of big shareholders and they want the money. There's a bit of that going on at the moment."
He said many companies would be making decisions on the interim dividend once they saw their company's half-year results at board meetings starting in mid-January.
Companies keen to preserve capital are also turning to dividend reinvestment plans with renewed enthusiasm. The listed Australian Infrastructure Fund announced last week it would be reactivating its DRP for its interim distribution in February. Pacific Brands has opted for both, cutting its 8.5¢ dividend to 3¢ while deciding to underwrite "at least" the next two payouts.
