Through the COVID crisis, dividends from Australian listed companies were cut by a greater degree than the decline in earnings. This was attributed to several factors, including a cautious approach by companies in the face of uncertainty, regulatory-enforced capital retention for the major banks, and prevailing high payout ratios leading into the crisis. With the earnings recovery now well underway and an improving outlook, forward dividend estimates are also rising quickly and have risen nearly 5% more than earnings since August.
Chart 8: ASX 200 Earnings and Dividends Recovery
Vaccine news in early November was the catalyst for a significant rotation in equity markets, including Australia, with out-of-favour cyclicals and value stocks rallying on these positive announcements. This trend continued over the period of December until present, albeit at a slower pace, unwinding some of the large underperformance of value over an extended period of time.
Chart 9: MSCI Australia: Value – Growth (Monthly)
The resources sector was key in supporting the returns of the Australian equity market in 2020, with earnings rising quickly in the second half of the year on the back of stronger commodity prices. The other large cyclical sector – financials – is now starting to show signs of a turnaround with solid results reported this month, which could mark the first time in years that both sectors have positive momentum.
Chart 10: Resources and Financials Earnings: Upward Momentum