There is a $30 billion dollar question hanging over the Australian share market at the moment.
With shareholders collectively scooping up at least $30 billion in dividends and share buybacks in the next couple of months, will they be ploughing that money back into buying more shares or will they be hanging on to it or employing it elsewhere?
If they do decide to buy more shares, it will be a major fillip for a market that is now faltering, in the classic “buy the rumour, sell the fact” trade.
In the lead up to the reporting season there were great hopes of a shower of cash from the many companies that have been trading very profitably – such as miners and banks.
Now that the hope has turned into wonderful reality – and iron ore prices have headed south in a hurry – that entire situation is being re-evaluated as some of the steam comes out of the market.
The question remains, though, will the (slightly) lower prices encourage a welter of buying with the dividend cash or will other opportunities be taken instead?
Well, it is a question that will be answered by a lot of individual investors, along with the institutions, given that some of the really big dividends have come from household names that are very widely held.
Buybacks are as good as cash, too
Very large buybacks – more than $10 billion announced by the big four banks alone – give shareholders the chance to decide whether they want to take advantage of selling part or all of their holding for cash.
Some super funds and others will use that as a chance to recycle or rebalance some funds by selling into the buyback and buying back more selectively or even pumping up the amount of cash being held.
Of course, the future actions of investors are inherently unknowable and mysterious, but I predict a large percentage of the unprecedented $30 billion will find its way back into the market for a few good reasons.
Cash is trash
One of the usual destinations for dividends is to invest in cash – either through bank accounts and term deposits or through government or corporate bonds.
The problem with that strategy at the moment is that interest rates are absolutely tiny and in post-inflation terms, actually strongly negative.
Investing in bonds seems to be even more fraught – to make a capital gain on a bond you need to buy it in the hope that bond yields will fall, which at the moment effectively means you are expecting negative interest rates.
The Reserve Bank has signalled very strongly for a long time that it doesn’t want to try out negative rates, preferring to buy back bonds in a form of quantitative easing (QE) instead if it needs to stimulate the economy.
Even that form of QE is due to be reeled in rather than expanded, so it would be a brave investor indeed who was ploughing into government bonds in the hope of capital gains on top of infinitesimal interest rates.
Property is great but has its issues
Property is another potential investment destination and it has a greater chance of attracting funds than cash or bonds.
One of the most dramatic effects of the repeated lockdowns in Melbourne and Sydney has been to depress the prices and rents on CBD retail, office and residential properties even as property prices elsewhere, and particularly in regional areas, were flying upwards.
Indeed, the latest NAB Commercial Property Survey has estimated Melbourne office vacancy rates at 10.9%, compared to 4% at the end of March last year.
That figure is still expected to be above 8% by June 2023.
CBD values falling
The report says those high vacancy rates have caused a 3.6% fall in the value of CBD towers in the past year, with a further 2% fall predicted over the coming 12 months and another modest decline in 2023.
Of course, that is just one element of an otherwise booming real estate market – particularly residential – although price growth may be in the process of moderating now.
Whether you see those falling CBD prices as a buying opportunity or not depends very much on your perspective but overall, even at current lower-than-normal rental yields, property is still a far superior yield proposition than cash.
How much extra you add or subtract for capital growth over time is an unknown, but given the performance of Australian property over the long term, it has still got to be a strong contender for the long-term investor.
And with a large variety of property trusts trading on the share market, some of that investment will end up pushing up some listed valuations as well.
Shares depend on pandemic recovery
Whether shares offer an appealing prospect for further investment depends very much on your view of how the COVID-19 pandemic will play out in Australia and around the world.
One thing to point out is that, by definition, dividends are paid mainly to experienced share market investors so they already have a strong inclination to buy more shares compared to the alternatives.
It is always tempting to extrapolate from the current state of affairs, which is why stocks have struggled a little recently despite strong profits.
However, if you can see through the current spate of lockdowns to a time when higher vaccination levels lead to more freedom of movement, it is hard to draw anything but a bullish case for shares.
We have already seen locally and overseas that pent up demand leads to a rush of retail and services spending as cooped up consumers celebrate freedoms that have returned.
The only cloud on this horizon would be that too much economic activity might tempt central banks to start considering winding back their stimulus measures and start to raise interest rates, which would put a handbrake on shares.
The uber bear case
However, the real bear case would be if the current Delta variant – or subsequent COVID-19 variants – proved more difficult to battle than expected.
Perhaps by transmitting more through very young and other unvaccinated people or by breaking through current vaccine defences and perhaps causing renewed lockdowns due to higher-than-expected rates of death and serious illness.
That would be enough to give even an experienced investor some pause about reinvesting their dividends into buying more shares.
On balance though, you would expect that a large part of the expected $30 billion in dividends will play a part in supporting the Australian share market into the new year and beyond, adding much needed buying pressure to a market that has already shown a lot of resilience despite adversity.