Cult of dividends a ‘dangerous obsession’

Cult of dividends a ‘dangerous obsession’

March 1, 2014

Vesna Poljak, Simon Evans

Australian companies are redirecting their cash towards dividend-hungry investors instead of stepping up investment to underpin future growth in a shift that has serious implications for the ability of the non-mining sector to shoulder a bigger burden.

Economists are equally frustrated that the cult of dividends is imperilling the transition from mining-led investment and standing in the way of jobs creation. The economy faces a 17 per cent fall in business spending in 2014-15.

George Clapham, head of Australian equities at Arnhem Investment Management, said the deployment of capital was an issue he raises with companies often.

”There’s a lot of focus on dividend because of the retirees and all the other people that want a fat dividend cheque. The funny thing about paying dividends is it’s like emptying a glass,” he said, in that once the capital was drained, it was gone.

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”At the end of the day you’re going to get a much better income if you’re in a growing industry. So it’s your growth in income that’s important, not this absolute obsession with a fat yield. And it’s a dangerous obsession,” he said, because a high yield could signify a downgrade.

Pressure is on boards to keep pushing up dividend payouts as self-managed super funds play an increasingly influential role in the Australian market. While heavy cost-cutting across corporate Australia has put most companies in a solid position, the catalyst for a future expansion of the economy is missing. Boardrooms are taking a risk-averse stance even though balance sheets are in good shape.

HSBC chief economist Paul Bloxham said: ”Certainly the capex numbers suggest that at the moment firms have fairly weak investment plans, quite low, and I think that would be consistent with the idea that firms are choosing to give larger dividends rather than making plans to reinvest their profits.”

However, Mr Bloxham also said this could be masking what could be a turning point for the economy, too. ”If you look at the very timely indicators of conditions in the economy, things have started to turn around in the fourth quarter,” he said, pointing to the NAB business survey as one of many examples.

Andrea Slattery, the managing director of SMSF Professionals’ Association of Australia, the umbrella body for the nation’s 532,000 self-managed super funds, said boardrooms need to take even more notice of how investors running SMSFs are thinking.

”They are the fastest-growing and the best-performing part of the superannuation sector,” she said. ”They’re looking for companies that are solid, and for those companies that deliver, they are very loyal.”

The number of SMSFs had risen from 100,000 in 1999 to 532,000 and investors were generally looking for a good yield, but also wanted strong future growth.

John Osborn, the chief operating officer of the Australian Chamber of Commerce and Industry, said the most important thing was to have the right broader policy settings to increase productivity and bring down costs. This would, in turn, trigger more confidence and enable companies to make riskier investments to drive future growth to benefit the broader economy.

”Businesses that feel more confident about their overall circumstances and the operating environment are more likely to make the riskier decisions around investment for the future,” Mr Osborn said.

Analysis by Perpetual shows dividends totalled $53.7 billion in the past 12 months and four sectors delivered 99.6 per cent of the earnings and 78 per cent of the dividends – financials, health, consumer discretionary and materials. ”When the banks and miners do well it carries the rest of the market,” said Matthew Sherwood, head of investment market research.

Credit Suisse analysts said: ”We applaud companies attempting to keep their shareholders happy. However, we hope they are not spreading themselves too thinly.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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