As the pandemic continues to rage, the question investors are now faced with is whether this resilience is sustainable or not.

Miners are the new banks

One thing analysts and fund managers agree on is that the dividend game in Australia has changed. Both in how much to expect in your pocket, and where it’s going to come from.

“Traditionally Australian investors have relied on the big four banks for income, but this paradigm has now well and truly shifted,” Plato Investment managing director Dr Don Hamson said this week. “In fact right now I would say iron ore miners are the new banks.”

UBS says dividends per share were revised up 3.3 per cent over the reporting season – though this largely reflected the depressed forecasts, rather than a rising payout.

“It’s still down a lot, let’s not shy away from that, but better than expectations heading into earnings season,” says Australian Foundation Investment Company’s Mark Freeman.

Banks blasted, miners minted

Aside from Commonwealth Bank’s better than expected payout of 98 cents – down from $2.31 a year ago – the big lenders largely underwhelmed on the income front.

ANZ’s deferred interim dividend of 25 cents a share was cut from 80 cents, and NAB’s 30 cent payout was down from 83 cents.

But Westpac cut its dividend altogether. This alone, according to Janus Henderson’s Global Dividend Index Report, accounted for a 60 per cent decline in Asian payouts over the quarter.

“Banks have also become more cautious in their lending book, particularly in a market where housing is falling, and perhaps have had less collateral then what they realised before February,” says Perpetual’s Sherwood. “So, as a result, they’re carrying more capital in the balance sheet.

“But if not all of these mortgagees on welfare find employment again then, at some stage, there is a risk that bad and doubtful debts will increase.

“And at that stage, that brings risks of not only lower dividends but also more capital raisings.”

The baton for dividends has been passed from financial giants to iron ore and gold miners sitting atop mountainous commodity prices.

Twiggy Forrest’s iron ore juggernaut Fortescue Metals delivered a $1 final dividend – up from 23 cents – for a total $2.25 billion as it posted a record profit on soaring iron ore prices.

Sector titans BHP and Rio Tinto also proved a relative bounty for investors. BHP’s reduced payout received a mixed reception from analysts but still came in at US55 cents a share. Rio Tinto’s interim dividend of $US1.55 a share was a 3 per cent higher than a year ago.

Mineral Resources, meanwhile, lifted its payout to 77 cents, from 33 cents while UBS also noted increased payouts from goldminers Newcrest, Northern Star and Evolution.

Others, meanwhile, have noted the emergence – and resilience – of tech and health sectors over the past couple of years.

“Healthcare and technology and the like, they’ve generally held up pretty well (this earnings season),” AFIC’s Freeman says.

“Cochlear is not paying a dividend because it’s more discretionary… but you’ve got the ResMeds, Fisher and Paykels, Sonic (Healthcare) and CSLs.”

Freeman, who also oversees AFIC stable members Mirrabooka, Djerriwarrh and AMCIL Ltd, said the structural headwinds affecting the traditional big-dividend payers may also herald a shift away from yield and into growth among investors.

“Increasingly over time you’ve had businesses like the FAANGs (Facebook, Amazon, Apple, Netflix, Google), they don’t really pay dividends, they reinvest and they grow their capital base,” he says.

“The sharemarket has been very strong, from share price appreciation, so you get more of your total return in the US market say out of capital growth than you would dividends.

“Traditionally in Australia dividends were a big contributor to total return and there’s a bit of a transition occurring to me, to me anyway. And if we see more technology and more health type stocks come to our market and grow then that trend will continue.”

Never waste a crisis

Further skewing the investment landscape this year is the government stimulus that has filled consumer pockets and shaved costs for retailers – especially those set up to benefit from society’s lockdown cocooning.

The primary culprit here is JobKeeper, the $1500 per fortnight wage subsidy implemented at the end of March aimed at keeping stood down workers in jobs. Many companies signed on to the program, expecting trade to plummet as the virus forced shoppers to stay home.

Instead, online trade boomed for many and shoppers were eager to spend, turning predicted losses into soaring gains, which boards then decided to share with investors.

Furniture retailer Nick Scali received a total of $3.9 million in subsidies and raised its dividend 12.5 per cent, netting the founding Scali family a total of $2.5 million, or around two-thirds of the company’s total subsidy payments.

Youth-focused footwear retailer Accent Group told shareholders it had received a total of $23.9 million in subsidies, and paid almost that entire amount out as a dividend. Chief executive Daniel Agostinelli also received a $1.2 million bonus.

Using JobKeeper in this manner was likely not the intention of the government nor the companies who applied for it in March, as sales were required to be down between 30 to 50 per cent in order to be eligible.

Regardless, many businesses didn’t let a good crisis go to waste, a move which drew the ire of Labor MP Andrew Leigh, who called out the practice in a speech to parliament.

In a note to clients this week, Commonwealth Bank analysts said criticism of companies who paid dividends while claiming JobKeeper relied on “perfect hindsight”, arguing the subsidy had fulfilled its purpose in retaining jobs.

Balance sheet strength

Perpetual’s Sherwood believes the COVID-19 pandemic, which is dragging on for longer than many expected, will still expose cracks in corporate Australia.

“Firms will strong balance sheets and resilient operating models should provide a much firmer foundation to investor’s income needs than these fly-by-nighters who have been news stories in 2020,” Mr Sherwood said.

“They have delivered large price growth to traders, but are less likely to deliver sustained income to investors. In the end price is what you pay, but value is what you get.”