Expect to see more merger and acquisition moves by Australian companies as they search for growth in a bid to feed the dividend beast.
That’s the view of Beulah Capital chief investment officer Peter Mavromatis, who manages a merger-and-acquisitions (M&A) fund that holds companies likely to be takeover targets, including GrainCorp, Transurban and more recently, Oil Search.
“Over the past few years, earnings growth has slowed, yet investors’ appetite for dividend has continued to grow,” Dr Mavromatis said.
Company boards were aware of this demand, and lifting their ratios accordingly, such as BHP, which boosted dividends despite posting its worst profit in 11 years.
“You can’t keep increasing your dividends at a faster rate than you’re growing your earnings forever.”
Nominal gross domestic product had been growing at a rate of less than 2 per cent a year, meaning companies needed to find other sources of organic growth.
Most recently, companies’ focus has largely been on cost-cutting as a way to boost earnings, Dr Mavromatis said, but as that reached exhaustion levels, there were signs of M&A activity picking up; he said transport and logistics, real estate and IT were the sectors to watch.
Australian oil and gas producer Woodside Petroleum was the latest to make a takeover bid for smaller rival Oil Search, but on Monday Oil Search rejected its $11.6 billion bid.
Oil Search chairman Rick Lee said, however, the company was open to rival offers, after the company said Woodside’s bid was “opportunistic” and too low.
Fidelity Australian Opportunities Fund portfolio manager Kate Howitt said at the top end of the market, Australian sectors were already heavily consolidated so there was not much room to move in M&A.
Those industries included law firms, childcare operators and aged-care facility operators.
“They are the ones that don’t attract much attention because it is business as usual for them,” Ms Howitt said.
Credit Suisse’s global private banking arm has a key investment theme around putting corporate cash back to work.
The deals have not been small: the M&A rally has been driven by the size of deals rather than the number of them, Credit Suisse Private Bank’s head of equity analysis Gerald Moser wrote in a research note.
Some sectors were in “particular need” of M&A deals, he said.
“IT companies are focusing on deals that help them to anticipate and respond to future trends.
“Healthcare is witnessing an increase in deals, as companies continue to seek to expand their product pipelines due to rising patent expirations and ageing global populations.”
Consolidation was happening in other sectors, Mr Moser said.
“Having suffered from the prolonged slump in oil price, some oil companies, particularly the smaller ones, are struggling now to finance their operations, and their shares are looking attractive,” he said.
“Shell’s acquisition of BG Group may have triggered another consolidation wave in the global energy sector.”
Companies, particularly in the US and Japan, were still sitting on high levels of cash, and therefore Mr Moser expected M&A activity to continue.
Credit Suisse Private Bank chief investment strategist in Australia David McDonald said while the global case for M&A was valid in Australia, local companies would ensure they maintained or boosted their payout ratios in order to satisfy investor demands.
“There is still pressure on companies to pay high dividends,” Mr McDonald said.
“Given global volatility and uncertainty in China, the nice divided yield is something investors are still looking at.”