Investors relying on dividends for income have had a rude awakening over the last few months, with many ASX-listed companies cutting or deferring dividends. But there are certain management terms to spot in company reports to analyse the strength of the business.
Angela Ashton, founder and director at Evergreen Consultants, thinks dividends will be impaired for a while.
“Banks have to keep lower dividends for a while at least for a year. I think it will be tough,” she says.
Ashton says there are a few terms in ASX announcements that investors can look out for, including “right-sizing,” “normalisation” and “one-off adjustments.”
ASX-listed companies are required to disclose immediately any information concerning them that a reasonable person would expect to have a material effect on the price or value of the entity’s securities.
This type of information covered by the rule is usually referred to as “market-sensitive information”.
An ASX guidance note provides some examples, including “a transaction that will lead to a significant change in the nature or scale of the entity’s activities.”
Here is what to look for in ASX reporting:
Dividend deferrals and cuts
The impact of COVID-19 has led to many ASX-listed companies to cut, or defer, interim dividends.
Quan Nguyen, head of equities at Zenith Partners, says: “A flow-on effect of an earnings downturn is the subsequent impact on dividends, as companies retain earnings, reduce payout ratios and raise capital to shore-up balance sheets.”
However, it is unclear as to whether a company’s dividend “deferral” is a euphemism for cancelling the dividend altogether.
Companies such as Westpac, ANZ, Bank of Queensland, Qantas, Northern Star Resources, Downer and James Hardie are among many that have deferred paying interim dividends this year. Flight Centre and Super Retail Group have cancelled their interim dividend payments.
Ashton says if a company has announced a deferral it will do its best to pay the dividend, but it will completely depend on the individual circumstances.
“The future is very unclear, but it depends on the business itself. In some cases, a deferred dividend will be paid but investors can’t count on it. It is better for the company to have the money on its balance sheet.”
Ashton says this is a nice way for a company to say that it is downsizing. This is likely to appear more in announcements due to the impact of COVID-19.
A company might say something along the lines of “we are looking to right-size the organisation due to challenges facing us ahead.”
As a result of the pandemic, employees are happier to work at home and offices may look to reduce office space.
Ashton says: “Companies likely won’t get rid of their offices but there will be a lot more flexibility. This could have a potential effect on real estate investment trusts (REITs) as there have already been cuts in valuations to some commercial properties.
“Companies are locked into leases, so this can’t happen straight away, but over time there will likely be less demand for office space,” she says.
EBITDA is earnings before interest, taxes, depreciation and amortisation. This is simply giving investors an idea of the profit prior to paying debts, tax and taking into account depreciation.
Owen Raszkiewicz, founder of Rask Group, says EBITDA is “just a fancy way of saying profit, excluding a lot of expenses.” The higher EBITDA figure, the better, he says — because the company is making more money.
This is almost the same as EBITDA except it reflects any changes to normalise the income and expenses of the business. It strips out one-off costs such as legal matters
Ashton says underlying EBITDA is the current EBIDTA from the business itself, not considering things like the sale of something that might impact gross profit. It is specific to a point in time.
“Companies sometimes take items out and call them one-off when they may happen every second year. Investors have to be careful when they look at it and think about whether it’s recurring or not,” she says.
Raszkiewicz says: “Sometimes these terms are OK, but often they are used to avoid presenting bad news to shareholders. Compare the ‘adjusted’ figure to what is written in official audited financial statements and make up your own mind.”
“Normalisation” is similar to underlying EBITDA, but is longer-term. It means presenting the earnings of a company without the impact of unusual or one-off situations.
Ashton says the company adjusts one-off expenses to show the true earnings of the business and refers to idea looking at earnings through a business cycle. This is generally reflected in the profit and loss statement.
“Normalisation is the average earnings through a business cycle, so it is a slightly longer time idea. It helps investors to understand the earnings from a business’ normal operations,” she says.
Compared to underlying EBITDA, which is more at the earnings line, one-off adjustments can be presented anywhere, such as the balance sheet: a one-off adjustment can involve writing-down the value of assets.
Ashton says: “An example could be buying a company and revaluing the assets. It could also be on the earnings side or anywhere on either statement that doesn’t tend to be related to earnings.”
Dividend payout ratio
This is the ratio of the total amount of dividends paid out to shareholders relative to the net income of the company. It is the percentage of earnings paid to shareholders in dividends.
This can be calculated by dividing total dividend payments by net profit, and multiplying by 100.