The ASX banks look set to slash dividends, with APRA telling banks to seriously consider suspending dividends during the current coronavirus-induced economic crisis.
APRA has written to authorised deposit-taking institutions telling them that if they do pay a dividend, it must be cleared by the regulator and be at a level that is 'materially reduced.'
Here's a closer look at the current situation facing ASX bank shares, and 3 sectors for income-hungry investors to turn to instead.
Bank dividends to be 'materially reduced'
While ASX banks have not been directed to cut dividends entirely (unlike their overseas counterparts), APRA said it expects banks to seriously consider deferring dividends until the economic outlook is clearer. If they do decide to pay dividends, these should be at a 'materially reduced level'.
Banks have long been a stalwart of dividend seeking investors, however cuts in dividends have recently been priced into the share prices of the big four banks. Shares in Commonwealth Bank of Australia (ASX: CBA) are down 25% this year, while shares in National Australia Bank Ltd. (ASX: NAB) are down 36%. Australia and New Zealand Banking Group (ASX: ANZ) and Westpac Banking Corp (ASX: WBC) shares are both down 35%.
The fall in share prices of the big four makes their dividend yields look tempting – at the time of writing, Commonwealth Bank is yielding 7.12%, Westpac's dividend yield is 11.19%, ANZ's is 10.03%, and NAB's is 10.62%. But these yields mean little if dividends are cut or suspended. The big four have not yet revealed their dividend plans, however Bank of Queensland Limited (ASX: BOQ) has elected to defer its dividend until it has more clarity on APRA's views.
Where can you find decent dividends this year?
The big four banks have historically been among the biggest dividend payers in the Australian share market. So if you can no longer count on them for dividend income, where should you look?
Not all companies are cutting dividends – some remain well-positioned to pay above market dividends in 2020. Others make solid dividend bets due to their defensive characteristics or market position. Below, we take a look at the most promising ASX dividend shares.
The miners
The commodities market has remained fairly positive during the downturn, with the price of iron ore in particular remaining around multi-year highs. BHP Group Ltd (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG) stand to benefit from the continued strength in the iron ore price.
Iron ore prices will bolster free cash flow for these 3 miners, so they should continue to pay healthy dividends. Yields are expected to be above those offered by other sectors and the ASX in general. At the time of writing, BHP has a dividend yield of 6.77%, while Rio Tinto is yielding 6.37%. Fortescue has a dividend yield of 8.84%. All are well above the average 5% forward yield for the ASX 100.
The share prices of the miners have also proven to be resilient throughout the recent market downturn, with BHP's share price bouncing back 25% from its March low. The Rio Tinto share price is up 15% from its low, while Fortescue is up 32%.
Healthcare sector
The healthcare sector has seen mixed results throughout the current market turmoil. While some shares have been sold off, others have booked solid gains on increased demand for their products. Shares in Ansell Limited (ASX: ANN) have been pushed higher as demand for its protective equipment has surged.
The higher share price means that Ansell's dividend yield has fallen to below 3%, however this is one ASX share that is unlikely to cut dividends – the company affirmed its guidance just last week, saying it was experiencing "very strong demand" for its hand and body protection products. Ansell is expecting earnings per share of between 112 US cents to 122 US cents for FY20.
Biotechnology company CSL Limited (ASX: CSL) is one of the largest companies listed on the ASX by market capitalisation. It delivers biotherapies used to treat serious diseases as well as influenza vaccines. CSL delivered a strong half year result with net profit after tax up 11%. Importantly, demand for CSL's biotherapies are unlikely to be impacted by coronavirus, as they are essential to the health of customers.
Demand for influenza vaccines has surged with the federal government urging people to get vaccinated as soon as possible. According to an article by ABC news, some pharmacies have reported vaccinating more people in the previous 3 weeks than they did in the entirety of last year.
CSL has a low dividend yield, but has steadily increased its dividends over the years. Its share price has also proven to be resilient, and is up 14% this year despite the market turmoil. Over the past 20 years, CSL has rewarded patient investors with share price gains of 6,632%.
Supermarkets
Panic buying has led to unprecedented demand for supermarkets, which have benefitted from surging sales. Demand increased so dramatically in late February that supermarkets were forced to introduce limits on purchases of popular items and suspend deliveries of online orders. Many of these restrictions remain in place as above average buying continues.
As reported by the Australian Financial Review (AFR), UBS estimated supermarket sales were up more than 25% in March. Gross margins are also expected to increase due to reduced wastage and promotions, although the cost of doing business is also expected to increase due to higher supply chain and store staffing costs.
The AFR reports that UBS is expecting supermarket sales to rise 9.5% in the March quarter and 6.1% in the June quarter, before moderating to around 5% in the September and December quarters. This means that supermarkets should be well positioned to pay decent dividends this year.
Coles Group Ltd (ASX: COL) and Woolworths Group Ltd (ASX: WOW) are both currently yielding just below 3%, but should have no reason to cut dividends in the near future. Metcash Limited (ASX: MTS) is yielding above 4%. The defensive characteristics of these shares make them a solid dividend bet. After all, people need to spend money on food, regardless of the economic circumstances.
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As of 7/4/2020
Kate O'Brien owns shares of BHP Billiton Limited, CSL Ltd., and Rio Tinto Ltd. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia owns shares of National Australia Bank Limited. The Motley Fool Australia has recommended Ansell Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
