Hell hath no fury like an Australian retiree scorned.
Shares in the country's giant phone company Telstra Corp. fell as much as 12 percent after it announced annual results Thursday, wiping off some A$6.2 billion ($4.9 billion) of value.
The reason for this massive hissy fit was a cut to Telstra's historically lavish dividend policy. Investors who've been scraping by on payouts equivalent to about 100 percent of underlying earnings will in future have to subsist on a mere 70 percent to 90 percent.
Why should Telstra shareholders be so sensitive about dividends, especially as net income came in ahead of analyst estimates at A$3.89 billion? The answer lies in the nature of Australia's equity market, and in particular the 1.1 million retirees managing their own investments via self-managed superannuation funds.
Helped by years of tax breaks and laws mandating that companies fund their employees' retirement savings, Australia's gray army has built up a A$648 billion piggy bank. The A$340 billion they have in equities and investment funds is equivalent to a fifth of the benchmark S&P/ASX 200 index, and their might is such that some analysts, such as Credit Suisse Group AG's Hasan Tevfik, argue they've distorted the investment priorities of the wider market.
Retirees' love of a household-name stock that provides a steady income without the fuss of buying or selling helps explain the Australian share market's obsession with dividend yield. There's certainly something unusual in the water: Of the 42 companies in developed markets with dividend yields above 5 percent and market capitalizations above $10 billion, 11 are Australian, according to data compiled by Bloomberg.
In some ways, this trend is a favorable one. Australia's big four retail banks and Macquarie Group Ltd., which all meet the key criteria of familiarity and generous payouts, trade on some of the highest price-book multiples in the world. As a result, when they want to raise equity capital -- as they all did in 2015, to the tune of an aggregate A$18.5 billion -- it works out rather cheap.
Still, Telstra's experience is a lesson that playing footsie on dividends can be a dance with the devil. Its desire to hold back just a thin slice of earnings alongside a 70 percent to 90 percent payout ratio would be considered reasonable in most markets. Chinese companies are notoriously stingy, as Gadfly's Shuli Ren wrote this week. Among major equity indexes, only the U.K. boasts ratios on a par with Australia's; the Shanghai Composite rarely turns more than a third of earnings into dividends.
That intolerance of the ups and downs of investment should be a worrying prospect for all the dividend plays in Australia's financial sector, given the risk that a slowing housing market could pose to banks' ability to keep giving such handouts. Politicians have long been wary of messing with the incomes of retirees. Australia's chief executives might be wise to follow suit.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
We've excluded nine U.S. pipeline operators that are set up as master limited partnerships, since their unusual structure biases them toward higher payouts.
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