No dividend bonanza for investors this reporting season, warn analysts

Investors have been warned not to expect a dividend bonanza this corporate reporting season, as companies look to preserve their balance sheets in the face of an uncertain economic outlook.

Reporting season is the name given to month-long periods each February and August where the nation’s listed companies report their half-year and full-year results, respectively.

Analysts have warned investors not to expect a dividend bonanza this reporting season.Credit:Simon Letch

It is a time particularly closely watched by smaller shareholders, as companies reveal their dividend payouts and any other capital returns, such as special dividends, which are paid directly to investors.

Retirees often rely on these dividends, plus interest from their savings, to make up any shortfall in their incomes.

However, analysts say it is unlikely companies will splash their cash this time around given the multiple potential perils and uncertainty ahead for the economy, including rising interest rates and inflation, together with commodity shortages and supply chain issues.

Richard Schellbach, a strategist at major investment bank UBS, told The Age and The Sydney Morning Herald companies are operating in an economic environment where momentum is fading.

“Because of that, a more conservative stance is warranted, and holding on to a bit more cash than they had in previous times is justified,” he said.

UBS does not expect any share buybacks or dividend increases from the top-200 Australian Securities Exchange-listed companies, which include some retail investor favourites, such as the big-four banks, supermarkets Coles and Woolworths, Telstra, and miners including BHP and Rio Tinto.

This would be a sharp contrast to earnings season last year, where shareholders were showered with more than $34 billion in dividends, together with $20 billion worth of share buybacks, as companies were on a high after a year of pandemic-boosted profits.

Schellbach expects revenue and earnings results from the past financial year will again be strong for most businesses, but this would be largely irrelevant to professional investors, who would instead focus on companies’ forward-looking statements.

Discretionary retailers such as Harvey Norman could be under the pump this reporting season.Credit:

“Everything in their rear-view mirror has been strong because, over the past 12 months, we’ve been operating in a peak economy cycle, so the actual profit results will be OK,” he said. “But I think the earnings estimates for next year’s results will be downgraded.”

Some sectors are likely to have a worse prognosis than others. For example, discretionary retail companies such as electronics sellers Harvey Norman and JB Hi-Fi, plus clothing retailers Myer and Premier Investments, are most likely to feel the pinch in the months ahead from contracting consumer sentiment.

“For retailers, things are uncertain,” says Rhett Kesseler, fund manager at Pengana Capital. “Their cost bases are going up, with wages, rents and inflation all increasing.

“Particularly for discretionary retailers, we’re not sure about the level of consumer spending going forward. I would imagine their boards would err on the conservative side.”

‘Returns to shareholders in the form of dividends are just not the priority they have been previously.’

On the flip side, consumer staples companies, such as the big-two supermarkets, are likely to be beneficiaries of higher inflation.

Analysts at Jarden told clients in a research note this week the grocery sector is likely to outperform, predicting another strong set of earnings through fiscal 2023.

Schellbach notes supermarkets could be one of the few sectors where investors could be surprised by stronger earnings or a more bullish outlook, though he still expects them to be somewhat conservative with their dividends, despite operating in a more stable section of the economy.

“They are aware the outlook is uncertain: there are cost-of-living pressures affecting their end customer, supply chain constraints that remain, labour shortages. Returns to shareholders in the form of dividends are just not the priority they have been previously,” he says.

Mining companies are another sector to watch. Some analysts think they may provide investors with an unexpectedly good result.

Market-watchers at Wilsons told clients last week that higher commodity prices could mean resource companies, such as Santos and Woodside, could generate “super-normal levels” of cash and lift their dividend payouts to investors.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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