Australia’s share market hit a high of 5,996 last year amid much positivity about the future for the market which had lagged the rallies in bigger markets, like the S&P 500 in the United States, since the GFC’s 2009 lows.
Since then the market has struggled.
Australian stocks have again underperformed the rest of the world and the ASX 200 is today languishing just below 5,000. That’s 17% below the high last year and yesterday’s low was the lowest price since July 2013.
The question of what ails Australian stocks, and the ASX, must include a recognition that the country, the Aussie dollar, and certainly the ASX materials sector are all viewed as proxies for China and global growth.
So with the Chinese economy looking weak and with commodities in the midst of an historic crash, it’s no surprise Australian stocks are under pressure.
Of course another culprit has been concerns about the domestic economic outlook and the attention of Australia’s banking regulator on the operations of the big four banks which are such a large part of the overall market capitalisation of the ASX 200.
But is there more than this weighing the ASX down?
Could it be that Australia’s listed corporates have become too focused imputation credits and the short-term management of the share price via dividend policy to the exclusion of growth and reinvestment in their businesses?
Just look how strongly BHP appears to be clinging to its increasing dividend policy as it grapples with a commodity crash and a share price not seen since the early part of this century.
While the global economy was on the up, and while there were few doubts about the local economy, shareholders didn’t seem to care. But, what was once a strength – increasing dividend payout ratios – has become a weakness as shareholders fret that the earnings, and management commitment, to underpin dividend policy will be hard to come by.
In a recent note on Australian equity strategy the research team at Macquarie might have provided 4 charts which show just how short term Australia’s corporate sector has become.
The important thing to note is that Australia’s corporate sector is in comparatively fine fettle.
Outside of the commodity related areas, corporate fundamentals remain strong (leverage is moderate, interest cover is exceptionally high, cash flows are growing and the maturity profile for non-financials is not aggressive), analyst Jason Todd wrote in the report.
But corporate Australia is not putting these healthy balance sheets to work. Rather 2015 was a new all-time high for the dividend payout ratio for the top 100 stocks on the ASX.
So rather than borrow, or invest free cash flow, corporate Australia is using an increasing amount of the profits earned to payout to shareholders as dividends.
That, Todd says, is coming at the direct expense of capital expenditure for these same companies.
As if to highlight that Australian companies are unlikely to be investing in anything other than their share price in the near-term Todd also says:
Given the spread between the cost of debt (4.1%) and the cost of equity (7.5%), we think the potential for EPS accretive buy backs remains an attractive opportunity for the market and for outperformance by stocks undertaking buybacks particularly given the recent mauling in share prices.
It’s perhaps a sign of the pressures on boards and CEOs from their shareholders for a continuing stream of dividends that holds them back from bigger long-term investments. But this is the way of market for Australian listed companies.