Firms put investment ahead of dividends
Investors may start seeing profit growth outstrip dividend growth, as listed firms start to gear up to invest during a stellar year for the economy.
Analysts say New Zealand stocks have been paying strong dividends in the past two years in an effort to reward shareholders at a time of low interest rates.
That has been reflected in a golden period for the NZX top 50 index, which grew 44.6 per cent over 2012 and 2013.
Now, with the economy and interest rates poised to recover, companies would need to keep some money back to increase capital expenditure.
Rob Bode, head of research at First NZ Capital said: ‘‘Companies were in a position to lift their dividends because post-2009, we had the GFC [global financial crisis] and then we had recapitalisation in 2009, not a lot of capex and relatively low growth. So balance sheets were in relatively good positions.’’
As soon as confidence returned, ‘‘there was a wish to restore dividends to a higher level’’, Bode said. ‘‘I guess our view is that process has been largely done. We would expect to see more settling down – in other words, dividends should rise commensurately with earnings from this point.’’
Andrew Bascand, managing director of Harbour Asset Management said boards were reluctant to cut their dividends in case the recovery was short-lived.
But for companies this was a good news story.
‘‘For the last two or three years dividend per share growth has been slightly stronger than profit growth and this is because companies did have very good balance sheets and cash was there. And they didn’t feel the desire to expand or acquire or merge,’’ Bascand said.
Now profits were likely to improve and companies would need some of that money.
‘‘Dividend growth will still be OK for many companies but I’m expecting profit growth to outstrip dividend growth for a lot of [them],’’ Bascand said.
Analysts said good dividend payers included Port of Tauranga, Air New Zealand, and Telecom, which had had share buybacks because of excess capital. Property funds had not paid out so well, despite rising share prices.
‘‘They headed into the GFC with very high levels of payout and they needed to lower their payouts,’’ Bode said.
Hallenstein Glassons had traditionally rewarded its shareholders well, but had to cut its dividend whenever earnings came under pressure.
SkyCity had amended its dividend policy on a number of occasions, depending on its growth requirements.
Analysts said the positive outlook for economic growth meant ‘‘a cyclical improvement’’ in many stocks, with the election injecting uncertainty in just a few. First New Zealand Capital was monitoring nearly 30 stocks during the current reporting season and 70 per cent were expected to show profit growth. Thirteen were expected to show double-digit growth.
Soft results were expected from the oversupplied utilities/electricity sector, and there were rising exchange rate headwinds for SkyCity.
But gains were forecast for the building sector and with restructuring or acquisitions, such as Heartland Bank.