Dividends to lag behind earnings, don’t expect a phenomenal pay day any time soon

Australian dividend investors are likely to have a struggle in this upcoming earnings and dividend season in September. Forecasts suggest that this will likely be the worst cut in at least a decade with a number of entities planning to cut, postpone  or simply cancel dividend payments, including the big fan favourites within the S&P/ASX200.

With more than a third of the top 100 cutting, postponing, or cancelling payments in the earlier earnings season of 2020, a similar outcome is expected this time around. It is a depressing reminder for many investors that there is still a level of risk, even in revered markets known for having outstanding returns historically. It is worth noting that while some equity markets do hint at a V-shaped recovery, the wider economy does not share those same results and dividends will lag behind earnings, so don’t expect a phenomenal pay day any time soon.

The data so far suggests a fall between 30-40% in dividend payments on the previous financial year, meaning the figure is between $24B and $32B as a current estimate. With the new lockdown imposed in Victoria, there are likely to be further revisions before the ex-dates as a defence of cashflow.

Still there are some outliers, some mining entities have been well placed to weather the pandemic, due to support from above average commodity prices.

Iron ore producers should have a better than expected outcome, with the greater than normal demand for steel in China with outputs up 4%. The demand argument aside, iron ore prices have risen 30% in the last few months with prices resting in the $107/t range and considering the cost of production is in the $13/t range, then profits should be substantial.

Considering the current economic landscape for ASX listed entities, I would not be surprised if we are to see a decline in the ASX200, in the near-term. Having this many listed companies either not providing or offering limited advice does not speak well for the likely hood of dividend payments. The current price in the ASX200 reflects on this as well with price struggling to get past the pain point of $6,200.

S&P/ASX200 – 15/07/2020

Regardless of this my eyes are going to be firmly focused on iron ore producers such as Fortescue Metals, BHP and Rio Tinto, with the occasional glance hovering on Big 4 offerings.