Amid Caution, Dividends Tipped To Stay Rock Solid

Even with the caution over a weaker-than-expected economy, analysts believe dividends paid by Australian public companies can be maintained, even though businesses are already paying out a record amount of profits to shareholders. Like moths to a flame, investors hunting for yield amid global uncertainty last year turned Australia into the highest-yielding equity market in the developed world. By mid-2013, the local bourse looked close to 20 per cent overvalued, according to Goldman Sachs. Since then, underperformance against its global peers, along with rising bond yields and dividend increases, has resulted in much of the yield premium disappearing. ''Following the underperformance of Australia relative to global markets and its continued growth in dividends, Australia has now moved back to a position where it no longer looks overvalued on the basis of yield'' Goldman Sachs economist Tim Toohey and head of strategy Matthew Ross said.

Given the turmoil in the global economy, part of the allure of Australian shares has been the solid and relatively safe stream of dividends. Although prospect of dividend cuts is slim, investors would react harshly to any reductions, and shares of these companies would be sold off in response. ''We continue to see some small downside to 2014 financial year earnings forecasts, but see few risks to dividends,'' Mr Toohey and Mr Ross said. ''Despite payout ratios now close to prior peaks, current dividend levels can be sustained even in the scenario where economic conditions do not recover''. However, the Goldman Sachs analysts noted that dividends have grown 8 per cent during the past two years, even as earnings have declined 6 per cent. This would make it unlikely that any recovery in earnings will flow through to even higher payouts.

The looming reporting season will provide an indication of the direction Australian businesses are heading. Some sectors face a tougher outlook than others, but Macquarie Bank division director Martin Lakos said overall, he expected an earnings recovery. ''We're looking for this reporting season to confirm that we've seen the bottom of the earnings cycle,'' Mr Lakos said. ''One of the key factors is going to be those companies with offshore earnings, to see if the translation effect of the weaker Aussie dollar is starting to come through. You're not going to see it all come through, but you will see some positive impacts because of that''. Also, companies in cyclical sectors such as.....

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