The dividend warning bank shareholders need to read

Dividends. They’re quickly replacing house prices as the national obsession (if only because the inexorable rise in house prices has become considered as almost inevitable).

And dividend investors’ patience is being sorely tested recently.

BHP Billiton — the Big Australian — proudly told investors about its ‘progressive’ dividend policy for years. And that, should it be required, the company could borrow to pay that dividend.

Fast forward a few weeks and that rhetoric is being ‘walked back’ as they say in politics — and fast. All of a sudden, attention turns to the company’s past deeds, with the inference being ‘we paid a dividend even when others didn’t’.

BHP’s balance sheet is being referred to as the company’s ‘priority’ — in other words, you won’t get a dividend if that payout threatens its financial strength and security.

Make no mistake — you’re being buttered up, just in case BHP needs to take a knife to that ‘progressive’ dividend.

The difference between right and popular

Now, if it does become necessary, that’s exactly what BHP should do — it’s the appropriate action of a long-term focussed board of directors. The problem isn’t what they might do in future, but what they said they’d do in the past.

The road to hell might be paved with good intentions, but the road to annoyed shareholders is paved with unkept promises — just ask Woolies shareholders, who happily banked increased profit margins that (in hindsight at least) might just have been paid for by sacrificing the long-term strength of the business.

That’s in the context of two stories in today’s Fairfax press. The first is ‘Analysts predict BHP’s dividend to halve’. That should come as no surprise. The second? ‘Big four ‘determined’ to hold dividends’.

And well they might be ‘determined’. But if, as might become the case with BHP’s ‘progressive’ dividend policy, such an intent becomes untenable, then the banks are going to have little choice but to wield the knife — especially as the regulator, APRA, is going to be making sure their balance sheets stay in good shape.

Oh, and it’s pretty likely they’ll have to raise more capital (by issuing new shares) for regulatory reasons in the coming years, too — so that’s not going to help.

No magic pudding

With a nod to Michael Pascoe’s recent column, there’s no magic pudding from which dividends are being paid either. A company either has enough money to pay them or it doesn’t.

Sure, you can stall the process for a little while by using underwritten dividend reinvestment plans (where a company sells new shares to help fund the dividend), a hike in interest rates and a few others, but at the end of the day, you still need to pay the piper.

Such an outcome isn’t inevitable. Maybe BHP shareholders’ dividends are rescued by a recovery in oil and iron prices. Maybe bank shareholders get lucky and credit growth continues unabated for a few more years.

Or maybe not.

Don’t put all your eggs in one basket

Many, many Australians — both inside and outside super — are investing for dividends. Retirees use them to fund living costs. Those who are still working like to see dividends as concrete evidence of a return for their investment. Those reasons are completely appropriate and valid.

But that approach comes unstuck when the companies in your portfolio are no longer paying the dividends you want or need. As the financial disclaimer goes, ‘past performance is no guarantee’. As BHP and bank shareholders might yet find out, to their displeasure, such a line can apply to dividends, too.

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