New Zealand Professional Investment Services Firm

Forsyth Barr

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Equity Strategy&nbsp;</h2>
The Dividend&nbsp;Hit Has Only Just Started&nbsp;
The politics of dividend distribution will heavily influence how corporates navigate capital management decisions as a result of COVID-19. In an environment where workers are being made redundant or being paid only a proportion of wages, where government's are providing wage subsidies, and where supplier contractual relief is happening, distributions to shareholders will need to be carefully considered by boards. Consequently, even in a lower earnings environment, we expect pay-out ratios to fall from recent elevated levels. Investors will likely receive less income for the foreseeable future. While dividends are an instrument of wealth distribution rather than wealth creation, lower bond rates and changes to bank funding requirements mean lower term deposit rates, which means dividends (where possible) will be highly valued by yield thirsty investors, in our view. This theme is, therefore, supportive to those dividend payers with relative COVID-19 immunity —​​​​​​​ in particular, utilities (Contact, Genesis, Meridian, Mercury, Trustpower, Vector) and telcos (Chorus, Spark).&nbsp;&nbsp;
Pay-out ratios have been climbing; NZ high relative to other markets&nbsp;
Over the past 10 years median pay-out ratios for the&nbsp;NZX50 have&nbsp;climbed from the&nbsp;low 70s to the low 80s. We accept that compositional changes have occurred but even taking into account new arrivals and share market departures, the same trend is visible. Pay-out ratios have increased&nbsp;but similar to what was observed through the&nbsp;GFC&nbsp;are&nbsp;now set to decline sharply.&nbsp;&nbsp;
Figure 1. Median divi pay-out ratio history for the S&amp;P/NZX50
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/126/389/original/image_44603735221585972078121.png?1585972077" class="editor-image img-responsive" data-smartkarma-image-id="126389"></figure>
Source: Forsyth Barr analysis
Figure 2. NZ pay-out rates are very high versus other markets 
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/126/392/original/image_30732839841585972139551.png?1585972138" class="editor-image img-responsive"></figure>
Source: Bloomberg, Forsyth Barr analysis
Dividends on hold
The host of dividend suspensions in the February reporting season reflect cash preservation for companies exposed to COVID-19 challenges more than the politics, but sets the scene for further suspensions over the next 12 months. Separately, the RBNZ has said that locally incorporated banks cannot pay dividends on ordinary shares and should not redeem capital notes, to further support the stability of the banking financial system during this period of economic uncertainty. Moreover, last week the European Central Bank (ECB) called on banks across the euro zone to refrain from dividend payments and share buybacks.
Good corporate citizenship will be a critical factor for navigating COVID-19
Companies that effectively balance the social good over shareholder distributions and profits will better navigate COVID-19 than those that don't, in our view.&nbsp;This may mean a greater impact than otherwise on near term profitability, but good corporate citizenship will likely have a longer lasting impact on labour productivity/retention, customer/brand loyalty and supplier relationships.&nbsp;
Andy Bowley andy.bowley@forsythbarr.co.nz +64 4 495 8246&nbsp;
Matthew Leach matthew.leach@forsythbarr.co.nz +64 4 495 1324&nbsp;
Forsyth Barr Research Team fb.research@forsythbarr.co.nz +64 4 499 7464

Equity Strategy&nbsp;
The Dividend&nbsp;Hit Has Only Just Started&nbsp;
The politics of dividend distribution will heavily influence how corporates navigate capital management decisions as a result of COVID-19. In an environment where workers are being made redundant or being paid only a proportion of wages, where government's are providing wage subsidies, and where supplier contractual relief is happening, distributions to shareholders will need to be carefully considered by boards. Consequently, even in a lower earnings environment, we expect pay-out ratios to fall from recent elevated levels. Investors will likely receive less income for the foreseeable future. While dividends are an instrument of wealth distribution rather than wealth creation, lower bond rates and changes to bank funding requirements mean lower term deposit rates, which means dividends (where possible) will be highly valued by yield thirsty investors, in our view. This theme is, therefore, supportive to those dividend payers with relative COVID-19 immunity —​​​​​​​ in particular, utilities (Contact, Genesis, Meridian, Mercury, Trustpower, Vector) and telcos (Chorus, Spark).&nbsp;&nbsp;
Pay-out ratios have been climbing; NZ high relative to other markets&nbsp;
Over the past 10 years median pay-out ratios for the&nbsp;NZX50 have&nbsp;climbed from the&nbsp;low 70s to the low 80s. We accept that compositional changes have occurred but even taking into account new arrivals and share market departures, the same trend is visible. Pay-out ratios have increased&nbsp;but similar to what was observed through the&nbsp;GFC&nbsp;are&nbsp;now set to decline sharply.&nbsp;&nbsp;
Figure 1. Median divi pay-out ratio history for the S&amp;P/NZX50

Source: Forsyth Barr analysis
Figure 2. NZ pay-out rates are very high versus other markets 

Source: Bloomberg, Forsyth Barr analysis
Dividends on hold
The host of dividend suspensions in the February reporting season reflect cash preservation for companies exposed to COVID-19 challenges more than the politics, but sets the scene for further suspensions over the next 12 months. Separately, the RBNZ has said that locally incorporated banks cannot pay dividends on ordinary shares and should not redeem capital notes, to further support the stability of the banking financial system during this period of economic uncertainty. Moreover, last week the European Central Bank (ECB) called on banks across the euro zone to refrain from dividend payments and share buybacks.
Good corporate citizenship will be a critical factor for navigating COVID-19
Companies that effectively balance the social good over shareholder distributions and profits will better navigate COVID-19 than those that don't, in our view.&nbsp;This may mean a greater impact than otherwise on near term profitability, but good corporate citizenship will likely have a longer lasting impact on labour productivity/retention, customer/brand loyalty and supplier relationships.&nbsp;
Andy Bowley andy.bowley@forsythbarr.co.nz +64 4 495 8246&nbsp;
Matthew Leach matthew.leach@forsythbarr.co.nz +64 4 495 1324&nbsp;
Forsyth Barr Research Team fb.research@forsythbarr.co.nz +64 4 499 7464

Equity Strategy: The Dividend Hit Has Only Just Started 

Contact Energy

Equity Strategy: The Dividend Hit Has Only Just Started