Dividend Vs Growth Dilemma?

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Australian Economy, Macro Economics

With the emerging scenario where dividend and growth play pivotal roles in many investment decisions, investors generally get attracted to dividends because of the benefits incurred from the franking credits against what is reaped through low-interest bearing term deposits. However, it is to be analysed that whether these companies also look at their own growth prospects while they intend to keep the shareholders happy through dividend payments. In the financial year 2016-17, Corporates were seen to increase pay-out ratios via dividends and the companies listed on S&P/ASX 200 distributed about $69 billion of profits to their shareholders, up from $57 billion delivered in 2015-16.

As per the latest profit reporting season, interim earnings for about 135 ASX 200 companies and 32 companies that reported full-year earnings, demonstrated that most of the companies have made profits and are investing this back into their respective businesses. As per CommSec, 94 per cent of half-year reporting companies reported for profit and this level has been above the 87 per cent long-term average, however, only 56 per cent lifted profit (which is below the 61 per cent average); while 87 per cent of half-year reporting companies declared dividends. In aggregate terms, dividends per share were lifted by 9.4 per cent against a year ago period. On the other hand, while aggregate revenues were lifted by 6.9 per cent, expenses also were up 8.2 per cent as some companies invested more into their business while some focused-on marketing and advertising expenses.

 Dividend Trends

Dividend Trends (Source: CommSec Earnings Season Update)

On a side note, the dividend yield that uses the dividend performance and measures it against the current price of the stock, might sometimes mislead an investor. Further, companies having a double-digit growth rate typically have below average current yield, and this might not attract investors looking for good income. It is also seen that a Company having a good track record of growth, is more likely to start paying or raising their dividends in future as compared to a Company having slow or negative growth.

For instance, Suncorp declared an interim dividend of 33 cents for H1FY18 which reflected a pay-out ratio of 90%. This was well above its historical interim ratios and was consistent to the commitment it has made to its shareholders for FY18. However, the group might have done this looking at the NPAT that dropped by 15.8% as compared to 1HYFY17. The share price movement was sinusoidal in past three months while total lending grew by 8.7 per cent. Telstra is another income stock that generally pays dividend from its cash flow and has a long-term growth trend.

Given the above, it sometimes becomes important to strike a proper balance between income and growth stocks looking at the shareholders’ interests. One needs to evaluate that whether a company with a Return on Equity of 20 per cent and an annual profit of $1 million, paying 100 per cent of its earnings as returns to shareholders would be better than a company with same financial scenario but reinvesting 100 per cent of earnings in its operations. The latter might deliver higher earnings after about 8-10 years of growth and might consider paying high dividends post the exorbitant growth phase. However, these are estimations that hinge on many factors, including the performance over the years, and any macro picture derailing the growth scenario.

Thus, the varied outcomes point to the fact that investors need to choose the stocks very prudently, whether growth or income, aligning with their long-term or short-term interests. It is thus a key to look at the fundamentals of the company, prospects of growth at the expense of paying high dividends or reinvesting in business, any growth catalysts, macro dynamics and other such parameters that help estimate the future in a better manner.


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