6:49 AM
Vinay Singh
SHOW me the money!
Forget Jerry Maguire - it was the plea on every shareholder's lips before this reporting season and by and large companies have heard it loud and clear and responded with big, fat dividends.
What this tells us about the share market is that there are two ways to make money from it - from capital growth as share prices rise and from dividends as profits are distributed to the owners of companies.
After five years of highly volatile share prices since the global financial crisis and with deposit rates on bank accounts falling in line with lower official rates, investors and companies have now firmly fixed on dividends as the best way to extract a return from owning shares.
And companies delivered those dividends big time, even if it meant giving up on long-planned growth strategies such as BHP Billiton's $80 billion of spending on the outer harbour at Port Hedland and Olympic Dam mine expansion.
Apart from the fact that those decisions now look inspired as the iron ore spot price sinks to US$90 a tonne, they allowed the BHP dividend to rise by 11 per cent even as profit slid by 35 per cent.
Figures assembled by CommSec economists Craig James and Savanth Sebastian show that dividends announced during the just finished company reporting season rose by an impressive 7.5 per cent even as overall profits fell by 22.9 per cent or $12.5 billion.
Of 145 companies covered by the research, 72 increased dividends while 21 cut them, with the rest steady.
These higher dividends may help to tempt some of the wall of cash that is being held by cautious households back to the share market
So how have companies squeezed more juice from a smaller lemon?
The answer is twofold - they have scaled back on capital investment and they have made a conscious decision to hold less cash on their well-padded balance sheets to encourage their shareholders to hang on and not dump their shares.
Even companies with challenges ahead, such as insurance/banking group Suncorp, managed to keep some positive share price momentum courtesy of a 15c special dividend on top of a 20c dividend plus a commitment to pay out between 50 and 80 per cent of future earnings.
These higher dividends may help to tempt some of the wall of cash that is being held by cautious households back to the share market, particularly as term deposits gradually ratchet lower despite red hot competition between the big banks for deposits.
Other than the rising tide of dividends, the other positive to come out of the reporting season was the resumption of some merger and acquisition activity.
City Index analysts pointed to the $4.2 million initial payment for Ausenco to buy Rylson Group, the $165 million purchase of Best Tractor Parts Group by Ausdrill and Graincorp's $472 million deal to buy Gardner Smith group and Goodman Fielder's commercial oils business as clear signs that the market is moving into a long awaited mergers and acquisitions cycle.
They point to mining services and gold mining as the sectors with the highest chance of seeing merger and acquisition activity in the next six months, with a takeover of Bendigo and Adelaide Bank an outside chance given that its market capitalisation is a little over the $3.1 billion mark compared to its book value of $4.2 billion.
However, the world is full of banks trading below their book value and without the local big four banks being able to snap up Bendigo and Adelaide due to competition concerns, it is hard to see an offshore predator swooping in to pick up a bargain.
Posted in: Latest Business News
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