21/08/2014 - 13:48

Stevens weighs in on dividends

21/08/2014 - 13:48


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Retail investors in Western Australia love their Wesfarmers and Woodside shares. Professional investors are not so sure, and neither is the governor of the Reserve Bank of Australia, Glenn Stevens.

Stevens weighs in on dividends

Retail investors in Western Australia love their Wesfarmers and Woodside Petroleum shares. Professional investors are not so sure, and neither is the governor of the Reserve Bank of Australia, Glenn Stevens.

The cause of the split is the question of dividends or, more specifically, when do generous dividends become a bad thing?

Retirees running self-managed superannuation funds will be muttering in their evening gin and tonics that it is nonsense to even hint that there could possibly be anything wrong with lavish payments to shareholders.

That view is understandable, up to a point, because retirees need dividends to fund their lifestyle.

Mr Stevens, and most young people who are not sitting on a share portfolio stuffed to the gills with high-dividend paying stocks, do not agree.

They would prefer to see corporate Australia investing in the future by building new factories, developing new mines and oilfields, and creating jobs for young people, rather than funding the twilight years of yesterday’s people.

Tricky, isn’t it.

On the one hand there is a unique Australian system which encourages investment in dividend-paying stock-exchange listed companies through a world-class (albeit slightly flawed) superannuation system, while on the other there is a danger of corporate Australia grinding to a halt as an ever-greater share of profits flow to shareholders rather than be reinvested in business development.

Boiled down, there is a debate developing that is dividing Australia into two camps – growth versus no-growth, which might also be defined as old versus young.

Events of the past 24 hours have crystallised the situation, with both Wesfarmers and Woodside reporting stronger-than-expected profit results, higher than forecast dividends and, in the case of Wesfarmers, a double-barrelled bonus in the form of a special dividend and a return of capital.

Retail investors, especially the growing mob of self-funded retirees, lapped it up. Wesfarmers rushed immediately to a 12-month share price high of $45.88 yesterday. Woodside did likewise today, hitting a fresh peak of $44.17.

Professional investors and Mr Stevens were dismayed because what they saw on the stock market, and in the dividend payments, was a short sighted reaction that put an unhealthy bias on profits today over growth tomorrow.

The RBA governor, during a presentation to a federal parliamentary committee, lamented the situation he had created, while also expressing frustration at the lack of investment by corporate Australia.

Blaming a lack of “animal spirits” in corporate Australia, rather than the need for even lower interest rates, Mr Stevens used particularly strong language for a central banker, saying that: “I have allowed the horse to come to the water of cheap funding, I cannot make it drink”.

Investment analysts working for some of Australia’s biggest investment banks also vented their frustration at the lack of obvious growth options in front of big companies, singling out Woodside and Wesfarmers.

That led to a remarkable situation in the financial community, because as Woodside and Wesfarmers were hitting fresh share price highs the professional advisers were recommending that both stocks be sold or, at best, not bought, which is what a ‘neutral’ or ‘hold’ recommendation means.

Hardest hit by the fanfare of downgrades and sell tips was Wesfarmers with Bank of America Merrill Lynch rating the stock as ‘underperform’ with a future price target of $37.50, down about 16 per cent on its latest price.

Credit Suisse formed the same view, as did Macquarie, with all three criticising the lack of growth and with Merrill Lynch tossing in a suggestion that there were “too many businesses (in Wesfarmers) going backwards”.

The critics were easier on Woodside with most views neutral but, like Wesfarmers, there was not a ‘buy’ tip in sight.

The question of WA’s top two companies being investment bank pariahs has been explored here in the past, so what the banks said today is not new to some readers.

What is new is the entry of the RBA governor into the debate of investment for future growth versus dividends for today’s lifestyle.

In a way, Mr Stevens’ comment about leading a horse to the water of low interest rates is reminder of an old saying from my school chaplain who famously said (many times) that he could ‘lead a boy to water, but couldn’t stop him drinking’.

In the current situation, the people doing all the drinking are retirees who are living comfortably off a flow of fat dividends, but even they must wonder how long the game can last.


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