Australian listed companies are in danger of falling into a “self-fulfilling doom loop” with weak investment leading to low growth which, if sustained, will only discourage further investment.
That’s the view presented by alphabeta Strategy Economics in a note posted on its website this morning, with the group suggesting that recent growth in dividend payouts from Australian firms “reflect a lack of growth ambition”.
Here’s why the group believes Australian companies are in danger of falling into a damaging spiral:
“Weak investment is leading to low growth which further discourages investment. The earnings growth outlook for our major companies – as measured by broker forecasts – is lower than at any time since the GFC.
Earnings growth in Australia’s top companies is forecast at just 6.6% over the next five years – that’s the same level of growth as anemic Japan and much lower than top companies in the UK and USA”.
alphabeta note that “instead of using their spare cash to invest in future growth, launch new products or expand into new markets, top ASX companies are now passively handing 63c in every dollar earned back to shareholders. That’s up from around 40c a decade ago”.
Based on the chart below, that’s a significantly higher proportion than companies in other nations such as Japan, the UK and US.
The reason for this anomaly, according to alphabeta, is that Australian firms don’t believe they have strong enough investment opportunities to warrant holding onto shareholder funds.
Not a very optimistic view, be it for the future investment pipeline or Australia’s economy as a whole.
While Australia’s stock market has held up relatively well in recent years – primarily due to lower interest rates, higher dividend payouts and an expansion in price-to-earnings ratios – alphabeta believe that this is merely creating short-term gain for long-term pain.
“While higher dividends and lower interest rates can boost the sharemarket in the short run, they are not long-term drivers of strong returns for investors.
The problem for the ASX is that higher dividends mean lower investment and, ultimately, lower long-term earnings growth. Falling interest rates raise the value of shares through Price-Earnings ratios, but this is a one-off effect, not a sustainable source of growth.
If Aussie companies don’t start investing, our index will become a global backwater – a dividend cash cow for domestic super funds rather than an attractive destination for global capital”.
As the chart below reveals, earnings growth has been close to nonexistent as a driver of earnings growth in recent years. Instead, higher dividend payouts and expanding PE ratios have done the vast majority of the heavy lifting.
While the group believes that government has a role to play in reversing this recent short-term trend through structural reforms, alphabeta also has some sage advice for businesses – lower your hurdle rates for investment, think creatively for new sources of growth and look abroad for investment opportunities, particularly in southeast Asia.
You can read more here.