Yield is back, back again!

EPS & DPS trend and forward expectations

Dividends per share for the S&P/ASX 300 index declined by 29% over the 2020 calendar year as corporates moved aggressively to preserve capital in the face of considerable economic uncertainty stemming from COVID-19.  Earnings per share also fell more than 21%.

Market conditions across a range of sectors began to gradually improve through the September quarter 2020, whilst the announcement of the COVID-19 vaccine and to some extent the US election in month of November boosted the expectations of a global economic recovery.

Leading into the February 2021 reporting season, the consensus expectations for the market was for a strong earnings and dividend recovery and the market did not disappoint. The charts below illustrate that EPS & DPS ‘upgrades’ beat ‘downgrades’ significantly across both the ASX200 and Small Caps.

Consensus expectations are anticipating a strong rebound in EPS and DPS for calendar year 2021 (off a low base) followed by reverting to more modest growth levels in 2022 and 2023.

In recent months, JANA has also observed a number of investment managers (value style in particular) identifying inflection points in the earnings of cyclical stocks which provides a watchpoint as a potential fundamental tailwind for the market should it lead to upside in EPS relative to 2022 and 2023 market consensus.

Major Sectors of Influence on EPS & DPS

Sectors which are driving the DPS recovery include Financials and Materials which in aggregate represent 50% of the market capitalisation of the S&P/ASX 300 index. The chart below illustrates consensus expectations for EPS and DPS on a forward-looking basis from both sectors.

Materials DPS CY21 forward expectations are considerably higher driven primarily by the price of iron ore trading at record levels of US$165tonne. Consensus anticipate the price of iron ore reverting to US$100tonne over the coming years which leads to EPS and subsequently the yield growth rate declining from CY21 elevated levels.

Financials DPS is forecast to surge higher in CY21 off the COVID-impacted CY20 base, driven by the Major Banks for several underlying reasons. Feb-2021 reporting season saw three Majors provide quarterly updates on bad and doubtful debts which are much lower than what they had provisioned for in CY20. The over provisioning will be written back to profits with consensus expectations for a large proportion to be paid back to shareholders via dividends in CY21. Banks are also overcapitalised relative to APRA set capital requirements and as such are expected to return the excess capital through improved DPS or via on-market share buybacks (including franking credits).

Market Dividend Yield & Payout Ratio

The dividend yield of the S&P/ASX 300 is currently 3% and according to consensus estimates is expected to improve to 3.6% in CY21 and gradually improve further in 2022 & 2023. Importantly, the payout ratio of the market in CY21 remains consistent with the long term average of ~70% although is expected to decline in the coming years.