In a statement released on Wednesday, Midsec director Phillip Middleton said the pressure banks were facing from the prudential regulator to preserve their capital ratios at the sake of dividends was ill thought out given the ripple effect it would have on retiree spending.
“Self-funded retirees have been set adrift during the pandemic because they have not received any cash handouts and watched asset values drop by between 20 per cent and 30 per cent,” Mr Middleton said.
“Adding to their pain, interest rates on term deposits have dropped, investment dividends have been reduced by companies struggling to stay sustainable, and now the salt in the wound is having APRA pressure banks to reduce their dividends too.”
Mr Middleton said banks should look at rights issues rather than foregoing dividends as most major bank shareholders were more interested in immediate income than capital growth.
“While the bank’s capital position is unaltered by having a rights issue to effectively fund the dividend, the shareholders are better off because they get some cash now, plus a franking credit refund later in the year,” he said.
“Additionally, bank share prices tend to recover quite quickly after going ex-dividend, so the shares don’t suffer the full cost of the dividend payment. This compares pretty poorly with the alternative of selling shares in a depressed market to get cash to live on.
“Rights issues do reduce share price growth in the future because there are more shares on issue. However, if you ask a retiree if they prefer income now or growth in the future you will get very few who go for the growth, and they can take up the rights issue if they want to.”
Mr Middleton said cutting dividends would benefit bank executives and the government over retirees by reducing franking credit refund amounts and prioritising share price growth.
“As it stands right now, APRA’s poorly considered approach brings together two interesting bed fellows who ultimately benefit – the government because it doesn’t have to refund franking credits and management teams of banks, whose bonuses are based on rises in the share price,” he said.
Maybe they had told clients that dividends per share have been steadily increasing since the early 90s, and implied that this was going to continue into the future. Never mind short term market falls, your dividend income is what matters, and dividends will stay constant or increase. Therefore, load up on dividend paying stocks.
Sorry, I don’t follow the logic from Midsec. Can anybody help me out?
Not a good look Midsec.
Responsible, professional, advisers ensure their clients portfolios are well diversified and generating tax efficient total returns in line with their risk profile. They don’t encourage asset concentration, or an outrageous sense of entitlement.
Trying to cover up for poor advice in the past that disregarded risk profiles, understated market risk to clients, and overexposed clients (especially retirees) to equity markets. All on the misguided advice to focus on portfolio income (dividends) rather than portfolio value. When the inevitable market correction arrives, along with necessary reduction in dividends, it is a bit rich to ask companies to perform an illusion that might in the short term mask the advice errors of the past. As a retiree advised to load up on shares and have only 5% of the portfolio in cash before the correction- not impressed.
MIdsec look like a bunch of idiots on the back of this!!!
Not going to happen, the purpose of a rights issue or share purchase plan is to shore up balance sheet or for an acquisition, definitely not to pay a dividend. I would think most self funded retirees would be eligible for the CSHCC so would receive the $750 (remarkably LIHCC holders aren’t). To be eligible for CSHCC under current deeming rates could have more than $2m in account based pensions, so there will not be too much sympathy for client with more than $2m invested losing some money. If their portfolio is down 30% that is not great planning or diversification, why don’t they have sufficient cash to pay pension payments?
How can the personal income needs of a group of shareholders be a factor in a board setting its dividend policy? Shareholders are perfectly capable of selling down their shares and seeking an alternative investment.
Some people are living day to day and foregoing daily essentials. I’m not a fan of generational warfare but a boomer having to actually engage in capital drawdown? Spare me
Well you started it. They’re struggling because they don’t know what terms like “cash reserve” mean, or sayings like “saving for a rainy day” Yet oddly they’re quite familiar with terms like AfterPay. A 25 year old driving around in an $80,000 Toyota Hilux and a Brand new house,…. that just lost their job at the Coffee Shop and you’re expecting me to be sympathetic. Can’t they just sell the JetSki rather than me paying higher taxes? Spare Me. Oh and I’m 42.