Why ASX 200 dividend yields could be set to ‘materially alter’
'Until you can actually prove an outcome, we don't believe it is actually in the price and/or of diminished valued,’ mused Morgan Stanley this week.
The coronavirus impact at a glance
Even as Australia’s coronavirus (Covid-19) infection rates slow – the situation remains far from resolved. Indeed, many parts of the country’s economy remain shuttered: wide-reaching travel restrictions remain in place and all but the most essential services are allowed to stay open.
On a company-specific level, the impact has been immediate and in some cases disastrous.
Many ASX-listed companies in the most impacted industries have rushed to shore up their balance sheets, be it through raising new debt or equity; while others have slashed their forward earnings guidance; stood down staff, slashed salaries; and reduced or cut their dividends entirely.
In a piece of research released this week, Morgan Stanley noted that some 61 ASX 200 companies – representing a staggering 18% of the index’s market capitalisation – had already withdrawn their guidance.
Some of the key names to withdraw their guidance thus far include: Qantas, QBE, REA Group, Woolworths Group, Aristocrat Leisure and AMP.
Other companies, such as the biotech giant CSL, tech-focused pizza restaurant chain Dominos, and machine learning company Appen – have actually taken the opportunity to reaffirm their 2020 guidance. Overall though, such companies remain in the minority.
Maybe most importantly however, this situation has created a problem for earnings visibility, with Morgan Stanley arguing that, ‘Our top-down earnings models point to a double digit reduction in forward earnings.’
The ASX 200 dividend outlook
As a corollary of lower earnings, Morgan Stanely argues that it is likely that ‘dividend payouts will also be adjusted and in some cases adjusted much greater than the actual hit to earnings.’
It would, in the investment bank’s eyes, be difficult for companies to justify high payout ratios while raising fresh capital or/and accepting government stimulus.
Finally, although the ASX 200’s current yield sits at an impressive 4.7%; as Morgan Stanley points out:
‘A return to lower payout ratios on what will definitely be lower earnings would materially alter ASX 200 yield credentials and make searching for sustainable yield even more important in this dislocated environment.’
Markets always discount – or factor in – present and future events, after all. Though, whether they do so accurately, is another matter entirely.
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