Australia's total payout ratio is below the global average of 92 percent: Goldman

A man monitors trading on the electronic share board at the Australian Stock Exchange in Sydney.
Saeed Khan | AFP | Getty Images
A man monitors trading on the electronic share board at the Australian Stock Exchange in Sydney.

Those fretting about the sustainability of shareholder returns in Australia, Goldman Sachs has a message: payouts aren't particularly high when compared with rest of the world.

Australia enjoys some of the juiciest dividend yields among developed markets – the benchmark ASX 200 dividend yield is 6.62 percent compared with 2.53 percent for the S&P 500 and 4.01 percent for Hong Kong's Hang Seng index, data from Reuters showed.

But a spate of dividend cuts by prominent resources firms due to depressed prices in commodity markets including oil, iron ore, coal and other raw materials, have raised questions on the durability of payouts. Others have expressed concerns that companies are being forced to pay high dividends instead of spending money for future developments.

Analysts at Goldman Sachs, however, believe when it comes to the total amount of cash that firms are returning through both dividends and share buy-backs, Australia sits below the global average.

There are two important points that need to be factored in, the Goldman analysts said.

First, in fiscal 2015, Australian firms returned 73 percent of their free cash flow, which is operating cash flow less capital expenditure, via dividends.

In absolute terms, the number is high, but not out of line with a number of other markets, Goldman said. Data provided in the report showed companies in Germany returned 85 percent of their free cash flow as dividends, while those in Switzerland returned 68 percent.

Secondly, Australian firms returned only 11 percent of free cash flow to shareholders through share buy-backs, whereas those in Switzerland returned 67 percent. U.S. firms gave back 61 percent and the global average was at 42 percent.

Goldman said the decision by Australian firms to pay large dividends and not buy back shares might turn out to be the better approach than many of their global peers, given that "equity market valuations have been quite high relative to history in many developed markets."

When the amount returned in dividends and share buy-backs is combined, Australian firms returned 83 percent of free cash flow, compared to the global average of 92 percent. Companies in Switzerland returned 135 percent of free cash flows, in Germany 120 percent and 104 percent in the United States.

The analysts said, "A number of companies in some markets [are] either dipping into cash reserves or borrowing to fund pay-outs."

By comparison, much of the increase in Australia's payout ratio has been "due to a collapse in the profits of mining and energy firms," according to the analysts.

They added the total payout ratio - which is dividends plus share buy-backs as a percentage of free cash flow - does not change drastically when mining and energy companies are taken out of the equation.

In the future, Goldman expects shareholder returns growth to be more muted in Australia.

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