Australian Banks Run Risk of Retiree Mutiny with Dividend Cuts

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Euromoney, May 13 2020

No developed market in the world has blue-chip banks paying higher dividends than those in Australia. It’s implausible to continue doing so during the coronavirus crisis – but banks fear a backlash from the income-loving retirees and retail folk who make up half their investor base.

Banks are slashing dividends the world over and investors aren’t exactly thrilled about it anywhere. But nowhere is the tension between bank prudence and investor expectation as extreme as it is in Australia.

The Australian market has always paid a much higher dividend yield than any other developed market – about 4.5% historically for the S&P/ASX200 index, compared with 2.5% for global equities – and traditionally the big four banks have been the foundation of that arrangement. It has been absolutely routine for many years to get between 5% and 8% yield from the banks.

On top of that, Australian tax law allows for dividend imputation, meaning that investors typically get a tax credit because the company is paying dividends out of post-tax income and therefore tax has already been paid. Consequently, Australians tend to express dividends in two ways: the outright dividend and the grossed-up figure, allowing for the value of that tax credit. In high-tax Australia, the grossed-up result can touch double digit returns.

It’s a great situation for the investor, and many retail investors, particularly retirees, build their entire investment approach around it. There are thousands of Australians whose retirements are funded by the steady and reliable income that comes from bank stock dividends.

That makes it a particularly tricky time when banks decide to stop paying them.

For many investors, big dividends are a lifeline, a duty, an inalienable right.

In recent weeks, three of the big four Australian banks have reported their half-year results for fiscal 2020 – Commonwealth Bank is the odd one out – with each of them, unsurprisingly, announcing dramatic drops in cash profits and increases in provisions.

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Chris Wright
Chris Wright
Chris is a journalist specialising in business and financial journalism across Asia, Australia and the Middle East. He is Asia editor for Euromoney magazine and has written for publications including the Financial Times, Institutional Investor, Forbes, Asiamoney, the Australian Financial Review, Discovery Channel Magazine, Qantas: The Australian Way and BRW. He is the author of No More Worlds to Conquer, published by HarperCollins.

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