ASX Faces Dividend Doldrums as Companies Retain Earnings

The Australian sharemarket is currently experiencing a significant decline in dividends, raising concerns among investors. Many companies appear to be “hoarding” earnings rather than reinvesting in growth opportunities or returning funds to shareholders. This trend comes as boards remain cautious amid fears of an economic slowdown and its potential impact on profits.

According to a report from Janus Henderson, the ASX saw one of the steepest declines in global dividend payouts during the second quarter of 2024, with total distributions plummeting by 19% year-on-year to $US7.1 billion ($10.4 billion). In contrast, global dividends surged to a record $US606.1 billion during the same period.

Typically, the June quarter is not a strong season for Australian dividends, as companies usually declare more during the third quarter when they announce full-year results. However, the weakness persisted through the August earnings season, with only $34.4 billion in dividends declared—marking the lowest amount since the COVID-19 pandemic affected markets in 2020.

Key Metrics Show Caution

The average payout ratio for S&P/ASX 200 companies has decreased to 53%, down from 62% before the pandemic. Simultaneously, the debt-to-revenue ratio has fallen from 33% to 22%, indicating a trend where companies are prioritizing debt reduction over borrowing for growth.

“This retention of earnings, rather than reinvesting them into high-return growth opportunities, is a concern for shareholder value,” noted Reece Birtles, Chief Investment Officer at Martin Currie. He emphasized that the reduction in payout ratios is a signal of "earnings stress," suggesting a lack of urgency for boards to address this issue.

Sector-Specific Challenges

The decline in dividends has been particularly pronounced among mining and energy companies, where falling commodity prices have directly impacted profits and shareholder returns. Consumer-facing businesses are also feeling the pinch due to reduced spending and rising costs related to rent and wages. Additionally, real estate investment trusts, which often carry higher levels of debt, have faced pressure from increasing interest repayments.

Ongoing Pressure for Miners

Morningstar predicts that the "dividend doldrums" will extend into the 2025 financial year, especially within the heavyweight mining sector, which is expected to see mid-single-digit declines in payouts. “China’s subdued growth outlook poses a significant headwind for bulk commodity miners,” remarked Morningstar market strategist Lochlan Halloway. Recent commodity price weaknesses, including a more than 35% drop in iron ore prices this year, contribute to these challenges.

Specific companies, such as Woodside Energy (ASX:WDS), have raised concerns due to their investments in new North American projects, which could affect their ability to maintain strong dividend payouts.

While major banks have managed to provide reasonable dividends over the past year, the outlook for these lenders has not seen significant improvement. For instance, although Commonwealth Bank (ASX:CBA) has seen its share price rise, flat dividends have led to reduced future yields, placing it below bond yields and diminishing its status as a strong dividend stock.

Future Outlook

Looking ahead, Morningstar anticipates only a modest improvement in the dividend outlook for the 2026 financial year, with cyclical sectors like consumer goods, industrials, and financials expected to benefit from improved economic conditions as inflation eases and central banks reduce interest rates. However, the mining and energy sectors are likely to continue weighing heavily on overall ASX payouts.

Despite the challenging landscape, some opportunities exist within the market. Stocks highlighted by Morningstar for their appealing dividend yields include APA Group (ASX:APA), Aurizon (ASX:AZJ), Dexus (ASX:DXS), Santos (ASX:STO), Endeavour (ASX:EDV), and Domino’s Pizza (ASX:DMP). These companies may provide investors with potential returns amidst the broader dividend challenges facing the ASX.