Dr Don Hamson from Plato Investment Management is always on the lookout for the best income opportunities from equities. His research suggests that there has been a 40% increase year on year for the dividends being paid out from the resources sector.
"One of the reasons why commodities are doing well is the demand out of Asia, particularly China, for premium quality iron ore, coking coal, and thermal coal.”
Hamson says that policies targeting lower emissions from energy generation are driving demand. In this interview, Hamson provides more details on this, highlights several blue-chip candidates for paying out special dividends, and summarises the big trends in dividends across the market today.
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What are the big trends in dividends?
As we've seen for the last probably 18 months, resources are back increasing their dividends. So strong rises by BHP, RIO, pretty much across the board, most of the resource stocks. Fortescue is obviously the odd one out, given lower quality iron ore trading at a significant discount.
But our numbers suggest about a 40% increase in dividends year on year for resource stocks, so that was a very strong theme, because the overall average increase on our numbers, ASX 200, was about 11% increase year on year. That's pretty strong overall, but clearly resources are the key.
Other trends, so we saw a list in payout ratios. People talking about that. In our industry, Magellan, big increase to 90% payout, about a 90% increase in dividends. That was strong. On the other hand, and there aren't that many there, but a number of the stocks that are affected by the Royal Commission are more subdued. You had token ones, an increase in CBA, nothing from IAG, and nothing from IOOF and you had a 30% fall from AMP. Bit softer in the financials but very strong in resources.
How sustainable are current dividends?
Well resources had a strong growth but clearly, it's a cyclical sector. One of the things driving resources at the moment, we even saw it in the balance payments numbers the other day, was there's strong demand for high quality Australian resources. It's interesting, climate change is obviously a big thing globally, big thing here, although government isn't really addressing it directly, but one of the reasons why commodities are doing well is that the demand out of Asia, particularly China, for high quality iron ore, high quality coking coal, high quality thermal coal, because if you still want to generate electricity, you still want to create steel, but you're trying to reduce emissions, how do you do it?
Well, you use the best quality iron ore, the best quality metallurgical coal. If you've still got to produce electricity, you haven't got renewables enough to stop the power stations, but you're better off running high quality thermal coal from Australia and not use the more rubbishy and more polluting coal that tends to be the coal that's around in China. I think that's a structural issue rather than a cyclical issue. A lot of it's just the Chinese wanting less pollution, and less pollution, you need higher quality inputs.
Is this a long-term shift?
Look, it's not forever, because clearly renewables are growing and all that sort of stuff, but there's a transition period. If you want to reduce emissions and pollution in a transition period, you've just got to use high quality feed stock.
Who are the beneficiaries?
Yeah, certainly BHP, RIO, BHP big increase in dividends. You can see that, that's why Fortescue is not doing as well, because their iron ore is less pure. I know they've got some things at the moment, trying to rectify that, trying to slightly increase their grades to get higher prices, but there's a massive discount now, probably the most it has been between high quality iron ore from BHP, RIO, and Vale. They actually have probably even slightly higher quality, versus your Fortescues and others. There's a big premium there for high quality, and I think that's here to stay.
Candidates to pay special dividends
I think there's a good chance for BHP and RIO. They've got two of the largest franking account balances in Australia. BHP, something like $15 billion, and just happens they've also got good cash flow at the moment, because not only have they got strong earnings on the iron ore, but they're selling their US oil shale business.
They have the ability to marry those together and pay it out, because clearly if you don't have the cash, how can you pay the dividends? Unless I suppose you can, some companies might be able to borrow, but for others, they may not want to. BHP, RIO are the obvious ones. Maybe Harvey Norman, because they recently did an equity raise, which we weren't sure why they needed to do an equity raise, so who knows what might happen there?