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Why dividend yields in Australia are so high

People often ask me why listed company dividend yields in Australia are so high. The average dividend yield across the Australian stock market is currently 4.1% or twice the world average. It is the highest in the world apart from Russia, Portugal, Turkey, UAE, Qatar and Nigeria.

There is a good reason for this. In the early stages of a country’s development, dividend yields start at high levels because investors are nervous about getting their money back if they have to wait too long. In the 1880s, dividend yields in Australia and the US both ran at 6% to 8%. As a country matures, investors develop trust in the corporate sector’s ability to invest wisely for future growth and so they let boards retain more of their profits to invest, and pay less back as dividends. In this sense, Australia is still like an early stage emerging market.

A history of reckless spending

Investors have a well-deserved distrust of Australian directors' and CEOs' ability to invest excess cash wisely, and so they demand profits be returned as dividends instead. Australian companies have a long history of wasting money on ego-boosting projects, usually in the form of reckless overpriced overseas ventures undertaken in booms. Then they are forced to sell, close or give the assets away after wasting billions of dollars. This trait has infected our big banks, miners, telcos, retailers, and hundreds of other companies. Success stories like Westfield, Macquarie, CSL, Seek, Cochlear, Sonic and Computershare are rare exceptions in a sea of red ink from failed expansions.

Australia is a small country in the middle of nowhere, and our directors find it hard to resist the temptation to chase the dream of free travel and adventure in pursuit of fame and fortune, all with shareholder money! Grand plans are usually hatched at the tops of booms, often with debt, with assumptions that prices will keep rising forever. They never do of course.

At the top of the 2011 mining boom when oil prices were above $100 per barrel, BHP spent $20 billion buying two shale oil operations in south eastern USA – Fayetteville for $4.8 billion and Petrohawk for $15 billion. BHP’s CEO was South African former management consultant Marius Kloppers, and Chairman was former Ford CEO Jac Nasser. Nasser had spent his career at Ford begging Canberra for handouts for Ford Australia, and begging Washington for handouts for Ford US. Neither knew much about mining or running profitable businesses without taxpayer support. BHP then spent the next six years throwing even more money at the troublesome projects while progressively writing off billions.

Click to enlarge

In theory, shareholders appoint the custodians of their companies

Finally last week, BHP announced the sale of both projects - Fayetteville for just $300 million and Petrohawk for $10.8 billion. At the same time, it wrote off another $3 billion, bringing losses to around $20 billion. That’s US dollars, not Australian dollars!

In the meantime, CEO Kloppers was fired and replaced by Scotsman Andrew Mackenzie, a real miner, and Chairman Nasser was replaced by former Amcor CEO Ken MacKenzie, with real experience running a very profitable business.

It is good to see BHP back in good, or at least better, hands once again. But we still don’t trust them. Thankfully, they are handing back all of the cash proceeds of the Petrohawk and Fayetteville sales to shareholders. They are also paying out record dividends from the windfall recovery in commodities prices over the past two years. The BHP share price is drifting up again, mainly because prices of commodities are rising, not because of good management.

The scary thing is that it could have been much worse. Kloppers and Nasser tried to use BHP to take over rival miner Rio Tinto for $150 billion in early 2008 when the iron ore price was at its all-time peak of $200 per tonne. It is now just $65 per tonne, and Rio was rescued by the Chinese government.

The problem is we can’t blame the CEOs, directors and chairpersons for bad decisions even if they had no relevant experience when there were appointed. In theory, they are put there by shareholders, so that’s where the blame lies. In reality, it is a cozy club because the big shareholders – which is mainly the big institutional super funds – stand by idly and let it happen. For small shareholders, it is easier to just watch from a safe distance and get out when we see trouble brewing.

 

Ashley Owen is Chief Investment Officer at advisory firm Stanford Brown and The Lunar Group. He is also a Director of Third Link Investment Managers, a fund that supports Australian charities. This article is general information that does not consider the circumstances of any individual.

 

5 Comments
Gen Y
August 03, 2018

You can hardly create the link between Australia having a 'developing sharemarket' and high dividends... You could argue our share market is one of the most developed in the world given we all have significant exposure to it through our Superannuation.

It is Tax, Tax, Tax and Tax. Most companies offer generous dividend reinvest terms, why? Because it is in many investor's best interest to wash the money through as a dividend with the fat refundable tax credit, then it is for the company to simply reinvest those profits. Many companies also complete Capital Raisings whilst also paying out a high proportion of profits as dividends, again for the same reasons.

Trying to create a link between anything else is just incorrect.

David Heath
August 02, 2018

Good article Ashley. Your criticisms of individual companies applies to the whole of Australia and governance. The ASX has gone up around 4 times over 30 odd years compared to 12 times for the Dow and around 60! times for the Nasdaq. Australian property is up around say 8 times over the same period. This is extremely strange as the risk premium for property is lower than for stock market investments. In addition if we take the last 10 years the ASX is up around 20% (Dow 110%) compared to inflation of around 30% so individuals who sell the overall market now pay CGT on real losses! The relative difference in the treatment of CGT between property and the ASX is one of the reasons why the ASX has underperformed compared to property. If Labor increases the CGT to around 36% at the highest marginal rate this would be close to the highest in the world - and still not indexed for inflation - which is the reason for the current 50% discount - I think I will move to NZ or Switzerland if I can get in! In Australia we seem happy to pay an extra $100b per year in financing costs (Australian banks are still five times bigger than in the US in terms of relative market cap - for doing the same work!) in oder to save a default of say $20b that might happen once every 10 years!

hank
August 02, 2018

I would have thought that tax policy in conjunction with a massive pool of superannuation money and high levels of retail share ownership may have a significant impact ??
(think imputation, significant SMSF sector, deductibility of interest & tax credits)

Peter Thornhill
August 02, 2018

I can think of no better endorsement of dividends versus retained profits. The episodes of misuse of shareholders money by megalomaniac CEO's are legendary.

Hank
August 02, 2018

I would have thought the tax system in conjunction with a massive superannuation pool plays a major role in the high level of payouts in both absolute & relative terms

 

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