A number of Australia's blue chip companies are expected to cut their dividend payments as the February reporting season gets underway today.
Falling earnings are the primary reason for the expected dividend cuts, with analysts expecting overall earnings to slump by 6% compared to the first half of last financial year.
But resources companies are a huge drag on that number, with earnings expected to almost half as commodity prices were crushed. Analysts expect the resources sector earnings to fall a monster 45%, with iron ore prices tumbling to trade around US$40 a tonne currently, compared to an average of around US$82 a tonne for the six months to December 2014.
Both BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) are likely to cut their dividends to shore up their balance sheets and maintain their credit ratings. BHP is expected to abandon its progressive dividend policy after the giant miner was hit not only by the plunging iron ore price, but also coal, copper and oil prices.
The big four banks Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) are also under scrutiny after raising around $24 billion in new capital last year and expanding their share counts.
Rising share numbers usually mean a dividend cut, but the banks could opt for underwritten dividend reinvestment plans (DRPs) which essentially means they don't need to pay out as much cash in dividends. As such, they could then afford to maintain existing dividends, but substantial dividend increases appear to be out of the question.
ANZ, in particular, is expected to cut its dividend, but analysts say CBA's dividend is safe.
Other blue chips expected to cut their dividends include troubled supermarket retailer Woolworths Limited (ASX: WOW), which is expected to report lower earnings, and energy plays Origin Energy Limited (ASX: ORG), Woodside Petroleum Limited (ASX: WPL) and Santos Ltd (ASX: STO), with all three hit by falling oil prices and writedowns.
Foolish takeaway
It's probably never been a better time that to look outside the regular dividend payers than now, including three I highlighted in August last year.
