Plato Investment Management has urged the big four banks to utilise underwritten dividend re-investment plans (DRPs) to keep paying dividends as they are a major income stream for Australians.
Plato’s managing director, Dom Hamson, encouraged the banks to take on the suggestion from the Australian Prudential and Regulation Authority (APRA) as it was a solution that could help address concerns about the ability of lenders to maintain capacity while paying dividends.
“We know many of Australia’s traditional income stocks have dividend re-investment plans (DRPs). These companies can choose to underwrite those plans, which effectively means that new shares will be issued matching the dollar value of all the dividends that they pay,” Hamson said.
“For all those investors electing cash rather than the DRP, the company will still issue new shares which a broker will sell on market during the DRP pricing period. This allows the company to completely preserve its capital as well as paying dividends to those who rely on the income to make ends meet.”
Banks have already been named as a sector where dividends were at risk, particularly the smaller players. This would be caused by the knock-on effect of the rent and mortgage deferments which would mean less cash and the need for banks to keep capital to service their own debt loads.
He said he expected Australia would fall into a ‘deep recession’ in the June quarter of 2020.
Hamson noted that the DRP would ensure Australian retirees and other investors who relied on dividend income from the big four banks were not “hung out to dry”.
Plato estimated that the big four banks paid 30% of gross dividends (cash dividends plus franking) of the entire S&P ASX 200 index in 2019.