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Qantas investors seek flight path for dividends

by August 22, 2016 General
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Qantas Airways shareholders have cheered chief executive Alan Joyce’s efforts to turn around the marquee Australian carrier, helping the stock more than triple in under three years. Now they want to see a roadmap for reinstating dividends.

Australia’s biggest airline, which has withheld dividends for seven years, is expected to announce on Wednesday record annual profit because of lower fuel expenses and faster-than-expected gains from Joyce’s restructuring.

Regular dividend payments may be reinstated at the end of the year ending June 2017, according to First NZ Capital ... Regular dividend payments may be reinstated at the end of the year ending June 2017, according to First NZ Capital Securities. Photo: Joe Armao

Singapore Airlines and Cathay Pacific Airways have already restarted paying dividends after the global financial crisis. Sydney-based Qantas has made two one-off capital returns totaling more than $1 billion in the past year, while not reinstating the dividend.

“That’s what everyone’s been waiting for,” said Karen Jorritsma, Citigroup’s Sydney-based director of equities sales for Australia and New Zealand. “They’ve got the ability to do it, so I think it would be taken extremely well.”

Joyce, 50, said this month at a conference in Brisbane that the board would again be looking at ways to return cash in August. Joyce, who took the helm in 2008, has purchased fuel-efficient Boeing. Dreamliners and retired old aircraft after the carrier posted a loss amid a fare-war with its biggest local competitor Virgin Australia Holdings. The Irishman also imposed a wage freeze and eliminated as many as 5000 jobs.

Regular dividend payments may be reinstated at the end of the year ending June 2017, according to First NZ Capital Securities. The brokerage also expects Joyce to announce another one-off return on Wednesday – a $500 million stock buyback.

A spokesman for Qantas declined to comment on any dividend policy before the company releases its results.

Net income seen at $1.13b

The turnaround helped Qantas build $2.3 billion in cash and equivalents on its balance sheet at the end of last year. Analysts expect Qantas to report Wednesday net income of $1.13 billion for the year ended June 30, based on the average of six estimates compiled by Bloomberg. Revenue is forecast to be $16.3 billion.

Joyce’s three-year turnaround plan announced in 2014 was to find $2 billion in cost savings. His program has already wrung out benefits of $1.36 billion.

With interest rates at record lows from the US to Japan, money managers are on a hunt for income-generating assets. Some funds are even obligated to buy such securities, so restarting dividends could open up Qantas stock to a wider group of investors, according to Forager Funds Management Pty.

“In the world we live in, where a lot of investors are interested in yield, that would be pretty important,” said Daniel Mueller, a Sydney-based analyst at Forager. “It sends a very strong message that the worst is behind us.”

Companies in Australia’s benchmark S&P/ASX 200 index deliver an average dividend yield of 4.5 per cent.

Domestic tax perks for Australian shareholders are key to determining when regular payments could restart.

Local investors can receive additional tax benefits, known as franking credits, on top of dividend payments. As Qantas pays tax on its growing profits, it accumulates more of these credits. Those credits, in turn, make normal dividend payments more tax efficient for local shareholders compared with stock buybacks or special capital returns.

Qantas has held out fig leaves to investors before. In November 2012, chairman Leigh Clifford said dividends would resume at the “earliest opportunity”. He didn’t give a timetable for the resumption at that time.

“Shareholders will be expecting it,” said Richard McDonald, a former Qantas pilot who’s chairman of the Australian Shareholders’ Association in the state of New South Wales. The association represents many retirees. “A lot of people have been a bit disappointed with the previous few years.”