2021 delivered record dividend growth. Now for 2022

Janus Henderson recently published their Global Dividend Index study. It revealed that headline dividend growth grew 16.8% globally last year, reaching US$1.47 trillion (an increase of 1.9% on the pre-pandemic high). 

Australia and the UK market contributed to over 30% of this increase, predominantly driven by the recovery of traditional payers who cut dividends across 2020, as well as the widespread issuing of special one-off dividends. 

The report also revealed that three of the top 10 dividend payers globally were Australian companies, having had no representatives in 2020 and two in 2019. All three of these companies were miners, aligning with the global trend of mining and banking companies as the growth leaders for dividends. 

This came on the back of booming profits from soaring commodity prices – BHP became the highest dividend payer in the world and issued the world’s largest-ever mining dividend at $12.5bn for the year.

Accordingly, I reached out to Jane Shoemake from Janus Henderson and Dr Don Hamson from Plato Investment Management to discuss:

• Their outlooks for dividends in Australia and abroad; and
• The drivers behind the significant dividend growth in miners and banks

One-off dividend growth set to taper

Jane Shoemake

Portfolio Manager

Janus Henderson

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The growth in dividends witnessed in 2021, as payments resumed after the onset of the pandemic, is unlikely to be repeated in 2022. Global dividends ended 2021 at 2% above their pre-pandemic high - according to our Janus Henderson Global Dividend Index (JHGDI) - and we anticipate growth from this level to be around 5-6% globally in 2022. This is more in line with the long-term growth trend for global dividends, although there are risks to this forecast given recent geopolitical events and central bank policy tightening in response to persistent inflationary pressures. Our expectations for 2022 dividend growth will be updated when we release the next quarterly JHGDI report.

Looking at Australia specifically, dividends rebounded strongly in 2021 (underlying growth was up 68.5% based on the Australian companies assessed in our JHGDI report) having experienced a sharp contraction in 2020 alongside other high yielding markets, such as the UK and Europe.

Australian dividends are therefore not expected to show much growth in 2022, having rebounded so sharply last year. Currently, Institutional Brokers' Estimate System (IBES) consensus dividend growth numbers for 2022 are growth of 3-4%, with no growth currently forecast for 2023. However, this is not entirely unexpected given the high level of payouts within the Australian market, which currently yields 4.8%.

As for miners and banks:

Mining dividends have benefitted from this rising commodity price environment as the global economy emerged from the pandemic with payments in 2021 almost double the previous record reached in 2019. Regular dividend payments increased sharply, reflecting exceptionally strong profit growth, with a number of companies such as BHP and Rio Tinto also paying large special dividends as management returned excess cash to shareholders. 

Mining dividend payments in 2022 and 2023 will be highly dependent on what happens to commodity prices and the outlook for global economic growth, particularly in China. Mining is a highly cyclical sector, so dividends won’t be sustainable at recent levels if and when the commodity cycle turns.

With regard to the banking sector, dividends were largely restored in 2021 after regulatory restrictions in most countries were lifted. Banking dividends are now within nine-tenths of their pre-pandemic high, with a number of banks also taking the opportunity to announce share buybacks as they look to return excess capital to shareholders. 

Dividend growth in this sector in future years will be reliant on the global economic environment and the ability of banks to maintain a capital position that satisfies the various regulators around the world. 

The dividend growth story is here to stay

Dr Don Hamson

Managing Director

Plato Investment Management

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Over time, dividends in Australia and abroad have delivered good long term growth, notwithstanding pandemic induced dividend cuts in 2020. 

For perspective, 2020 has been the only year of negative global dividend growth in the past decade.

So, notwithstanding an exogenous shock to global economies, we feel that this long-term dividend growth story can continue over the next 12 months after the very strong recovery in dividends in 2021. 

Locally, we think the ASX200 can deliver around a 5.5% gross yield including franking credits in the next 12 months and believe active and tax-effective portfolio management can deliver additional income on top of that.

As for miners and banks...

For the miners, surging commodity prices have led to strong increases in cash profits, which enables companies to pay strong dividends. We anticipate strength in commodities can continue in the short to medium term, especially in light of the supply shock emanating from the sanctions on Russian exports. 

The other factor underpinning the strong dividends we have seen from miners is capital discipline. In previous cycles, miners have often reinvested heavily as commodity prices increase, but this time around they have been much more conservative with their investment plans, enabling higher dividend payout ratios.

Longer-term, we expect most commodity prices will return to trend, but it’s important not to discount the impacts of decarbonisation which will see demand for some metals, particularly those used in electrification, remain elevated. It’s also worth keeping in mind that producers have shown strong investment discipline. This reduction in CAPEX investment may mean that higher than expected commodity and fossil fuel prices will remain for some time, which will be good news for shareholders who rely on income from mining and resources stocks.

When it comes to the banks, dividends have rebounded off a low base following the cuts brought about by the pandemic in 2020 and the corresponding restrictions imposed by APRA. They are yet to return to 2019 levels and we think that will happen in the foreseeable future as remediation costs disappear and as cost-cutting initiatives bite. However, longer term, we don’t see strong growth in bank dividends.

Conclusion

After unprecedented levels of dividend payment growth in 2021, our experts are approaching future years with a degree of conservatism. However, they are both aligned in the view that dividends will continue at an upward rate, albeit constrained given an already high yield of approximately 5% shown by the ASX200.

Diving deeper into what the future holds for traditional dividend heavyweights across banks and miners, two different pathways are emerging. Miners have benefitted greatly from surging commodity prices and disciplined capital management, allowing the issuance of record special dividends. For banks, however, their dividend rates have not yet returned to 2019 levels and look set to experience constrained growth beyond 2022. 

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