How Dividends Will Pan-Out for Listed Investment Companies in 2020?

Summary

• Dividend recovery in companies will likely take some time since conditions are uncertain and unpredictable. Investment managers are likely to prefer companies that can grow dividend payments over time.
• Djerriwarrh Investments manages a small portfolio of ASX-listed companies with quality. The firm has lowered full-year dividend for FY20 since the income from investments decreased as a result of dividend cancellations and deferrals.
• WAM Leaders’ portfolio is allocated to Australian large-cap companies. The firm has delivered significant outperformance against its benchmark over the year to June 2020. WAM Leaders also increased full-year dividend by 15% over the previous year.

Dividend yields for some companies are quite deceiving at the moment, as annual dividend yields are considering their dividends from the pre-COVID environment. However, businesses will take time to recover their dividends to pre-COVID levels.

Listed investment companies are also not immune to income shocks given by companies across markets. Dividends and distributions were cancelled or deferred in the wake of crisis, as management interventions were centred on liquidity management and sustainability.

Meanwhile, investment managers must be emphasising on companies that could grow their dividends back to pre-COVID levels at the earliest. It is also about the type of fund as income outcomes could be different for funds.

Related: Are Most Dividend Yields Flawed Now: 2 Areas Investors Should Look at; Balance Sheet and Cash Flows

Dividends will likely start recovering as economic activity resumes on a broader scale, and best outcomes would arrive once a vaccine is widely accessible, suppressing the psychological impact of the disease on consumers and workforce.

But businesses with diverse revenue streams, annuity-style revenues, and positive operating conditions could pay dividends in the wake of widespread cash flow shocks. After March lows, investors have increasingly favoured such businesses, especially the ones with high-growth prospects.

As reporting season comes closer, management commentaries by Corporate Australia will set the tone for expected dividend returns to shareholders this year. Incidentally, the surge in new infections in Victoria and New South Wales will collide with the reporting season, and management would include the impact of disruption caused by measures implemented in response to the outbreak.

Although most of the measures are limited to two states with more restrictions in Melbourne, the business impact and return to normalcy remain uncertain.

Djerriwarrh Investments Limited (ASX:DJW)

Djerriwarrh Investments holds ASX listed companies. At the end of June 2020, the firm held major large-cap companies from ASX, including BHP Group (ASX: BHP), Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corporation (ASX: WBC), Macquarie Group Limited (ASX: MQG), and National Australia Bank Limited (ASX: NAB).

For the year ended 30 June 2020, DJW declared a total dividend of 14 cents, down from 20 cents a year ago. The firm has declared a final dividend of 5.25 cents, fully franked, to the shareholders on the register on 7 August 2020.

Djerriwarrh also applies option strategies to realise additional gains, allowing to generate immediate income. The firm acknowledged that COVID 19 impacted income stocks, which ‘would do normally well’ during a crisis, but information technology and healthcare sectors emerged as winners.

As several companies reduced or deferred dividends, income from investments was down to $28.6 million from $39.7 million last year. Income from options stood at $7.7 million, up from $6.4 million in the previous year.

Over the year, the firm lowered total number of positions to 49 from 59, restricting portfolio to quality businesses. Investment manager continues to maintain a balance between income stream in short-term, and capital and growth over long-term.

On 21 July 2020 (AEST 01:04 PM), DJW was trading at $2.680, up by 2.682% from the previous close.

Washington H. Soul Pattinson and Company Limited (ASX:SOL)

Washington H. Soul Pattinson (WHSP) is not a listed investment company, but it operates as a similar business with substantial investments in listed as well as unlisted markets. The firm has a rich history of paying increasing fully franked dividends.

As a result of the merger of TPG Telecom and Vodafone Hutchison Australia, the firm would change its accounting method for valuing this investment. With effect from the merger date, 29 June 2020, WHSP would value investment using fair value through other comprehensive income.

Since WHSP now holds just over 12% compared to 25.3% pre-merger, it no longer needs to recognise TPG as an associate. It is estimated that financial impact would be an after-tax profit in the range of $1.12 billion to $1.17 billion, subject to audit and underlying assumptions.

At the end of January 2020, WHSP’s share was trading at a 5.8% discount to the gross value of assets in the portfolio. The firm declares dividends from the cash received from its portfolio companies. In March, WHSP stated that the firm expects to receive cash from investments in line with the previous year to support its dividend payment.

Managing Director, Todd Barlow noted that an investment in WHSP with dividends reinvested, over the last two decades to 31 January 2020, delivered 11.1 times return compared to 4.2 times in the index. He added that that recent events gave opportunity for investments and the firm was actively looking for businesses with potential of outperformance.

Chairman, Robert Millner stated that a diversified portfolio of resilient businesses placed WHSP to weather the disruption in markets. WHSP paid a fully franked interim dividend of 25 cents per share on 14 May 2020.

On 21 July 2020 (AEST 01:05 PM), SOL was trading at $20.550, up by 0.587% from the previous close.

WAM Leaders Limited (ASX:WLE)

WAM Leaders is one of the listed investment companies run by Wilson Asset Management. The firm ended FY2020 with an outperformance of 10.4% against its benchmark S&P/ASX 200 Accumulation Index.

The investment manager emphasises on large-cap businesses with strong business fundamentals backed by favourable macro-economic conditions. This strategy has enabled the firm to deliver outperformance since inception in May 2016.

WLE declared a fully franked final dividend of 3.25 cents per share, taking total dividends for FY2020 to 6.5 cents per share, up by 15% over the previous year.

On 21 July 2020 (AEST 01:06 PM), WLE was trading at $1.140, up by 0.885% from the previous close.

Do Read: Franked Dividends and Global Growth Funds: WQG, MFF

(Note: All financial information pertains to Australian currency unless otherwise stated)