Don BoredWalk looks at the trend of rising dividend payouts.

When Telstra announced recently that it was switching from growth to utility status by promising capital returns and higher dividends and share buybacks over the next three years, many in the sharemarket sighed and said, ‘well it was inevitable’.

Telstra was a company merely acknowledging the reality of its operating environment and performance. Growth was no longer an option for the country’s most profitable company.The new reality was boring.

And so it proved as the shares surged by $5, only to fall backwards towards $4.80, then edge higher as investors wondered about the election and then decided that whatever happened, Telstra would be the same old boring Telstra, new chairman or not.

But today a ‘growth stock’ joined the higher payout regime, while maintaining that it will continue to grow strongly, possibly at double-digit levels, for the next year or so. And continue to pay a fully-franked dividend.

Coca Cola Amatil, long considered to be a good growth stock in the market, despite some lean years, has been re-rated in the past couple of years since former Foster’s Wine boss Terry Davis took the helm.

Out has gone the old, muddling approach, in has come good capital management methods, a tougher approach to diversification, but some takeovers, especially Neverfail, and a commitment to boost returns.

The shares have risen on this sensible management technique and CCA has prospered, contrasting with its US parent which has stumbled from management problem to operating disaster to slowing growth and compressed margins.

Now, the Australian company says it’s going to lift dividend payout from the previous 60%-70% range to a new level of 70% to 80%. On top of this the dividend has been lifted 25% on 2003, and with it now 100% franked (50% last year), the gross payout will be more than 40% higher to shareholders. Which no doubt helped push the shares higher.

Over the next year or so cash flow will continue to rise, debt is forecast to ease, earnings grow strongly. Big takeovers will be ruled out by this new approach as CCA attempts to get more growth out of what it has, just like Telstra: but more successfully.

Telstra is much harder to move because of its bulk and size (although a good clean out of some management layers might help). Ridding it of the political plaything tag would also help. But when two good Australian companies announce a new policy of sharply improving rewards for shareholders, other companies should be taking note.

And so too should those performance-driven institutional shareholders, hell-bent on trying to pick growth stocks and not doing very well. Shareholders are wanting higher returns from companies in mature markets or in cosy duopolies or oligopolies.

The need to compete is token, price rises are easily obtained, and the bottom line surges. (Take CCA early last month it shoved up many of its drinks retail prices by between five and 10c a bottle or can. And at Woolies and Coles though, the price remains stuck at the ‘special’ regular price of $1.32 a bottle for the 1.25 litre bottles. That’s down from the previous level early last year of up to $1.65 a bottle).

Investing in companies like Telstra, CCA and the like is not sexy, but it shouldn’t be. Those who manage money this way should not be highly paid, and fees and charges for investors should be slashed. Now that would be a novel approach, but it’s too risky for these managers and their owners who need the regularly transfusion of management fees from punters.

The big banks are prime candidates for this new approach. They have been running share buybacks and capital returns, but a simpler and
more rational approach would be to boost payout levels from around the present 60% area for the big five, towards the 70% of CCA and
Telstra.

Any more than that might be too risky for banks. These banks are merely generators of excess capital every year or 18 months. They don’t need high levels of retained earnings, such is the size and strength of their balance sheets.

Even a sharp drop in housing would not put a strain on their balance sheets. And while the poor old NAB is being belted by the greedy institutions for committing to maintain its next dividend at 83c, the bank is right in line with the new trend, as shown by Telstra and CCA.

In NAB’s case its higher payout ratio will result from lower earnings. But as a concept it should be followed. Not to increase the risk profile of the bank, but to provide bigger rewards for shareholders from the present oligopoly.

Either that or simply cut some bank fees and charges, or freeze them at present levels for a number of years to provide as wider benefit
as possible.

Woolworths and a recovering Coles Myer will also be candidates for growing pressure for higher dividend payouts, even though Woolies has the ALH bid on its plate and a billion dollars to find.

I’m sure shareholders would prefer higher fully franked dividends from a mature and well performing business, than the higher risk profile of plunging into hotels as a means of achieving more quickly the growth ambitions in liquor of CEO Roger Corbett.

Coles, of course, is on track for sharply better earnings this year and had the capacity already to reward shareholders with some significant capital management.

Peter Fray

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