What happens to stocks that miss dividend expectations
Missing dividend expectations can trigger both a knee-jerk selloff, analyst downgrades and a prolonged underperformance in share price.
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Mentioned
KEY POINTS
- Dividends are arguably one of the most important metrics for larger cap stocks and missing dividend expectations can drive both a knee-jerk and sustained share price selloff
- Deterra Royalties announced a dividend payout ratio cut from 100% to 50% to fund the acquisition of Trident Royalties
- Deterra shares have sold off more than 10% in the last two sessions, trading near levels not seen since October 2022
A lower-than-expected dividend payout tends to trigger a textbook share price reaction – the stock experiences a knee-jerk selloff on day one, and continues to sell off on day two as brokers downgrade their target prices.
In this educational piece, we'll analyse a recent dividend cut and its price action, and review some notable misses from February reporting season.
Deterra Royalties' Dividend Payout
Deterra Royalties (ASX: DRR) exclusively manages royalty interest in mining projects, notably the Mining Area C Project, operated by BHP. This business model allows the company to maintain a steady stream of income and dividends for shareholders.
In the past two financial years (FY22-23), Deterra maintained a dividend payout ratio of 100% of net profit after tax.
Last week, Deterra announced an all-cash offer for Trident Royalties – a listed royalty company that invests across a breadth of mining commodities, including lithium, gold and copper – for $276 million. The company plans to fund the acquisition via its existing $500 million of undrawn facilities.
"It’s too early for us to form a view as to the value accretion/dilution of this acquisition, but we’d highlight that potential Trident 2026 pretax revenue of ~US$23m would represent a post tax return of ~9% before opex," Citi analysts said in a note on Monday.
Given this offer, Deterra announced that while it will pay out 100% of its FY24 net profit as dividends, it will thereafter target a payout ratio of 50%. A rather uncharacteristic change of payout ratios.
"Today’s adjustment to our dividend policy is designed to better align it with Deterra’s targeted longer-term balance between capital growth and income returns," said Managing Director Julian Andrews.
To add some perspective, Macquarie was expecting the following numbers for FY23-26.
FY23A | FY24e | FY25e | FY26e | |
|---|---|---|---|---|
Revenue ($m) | 229.2 | 247.9 | 254.2 | 212.3 |
Adjusted profit ($m) | 152.1 | 165.0 | 170.1 | 142.9 |
Adjusted EPS (cents) | 28.8 | 31.2 | 32.2 | 27.0 |
Total DPS (cents) | 28.9 | 30.9 | 31.5 | 26.5 |
Source: Macquarie
The acquisition was poorly received, with the following price action on Friday, 14 June.
Open: -2.7% to $4.34
Session low: -12.6% to $3.90
Close: -6.95% to $4.15
Volume: 3.63 million (vs. 20-day average of 15.1 million)
Deterra shares are currently down another 2.5% on Monday, 17 June.
"For DRR shareholders, the disappointing aspect will the be announced reduction in dividend payout. Trident’s principal exposure is to lithium and for some DRR investors this may present a concern," said Citi analysts.
On a more light-hearted note – If you want to maintain the same dividend payout, you can just buy twice as many shares! (although you might want to double-check the math on that)
Thinking About Austal
One of my favourite examples from February reporting season was from shipbuilder Austal (ASX: ASB). The company unexpectedly declared no interim dividend ahead of a "large capex program to increase shipbuilding capacity and capability."
While most of its first-half FY24 results were in-line with market expectations, the stock finished the session down 12.6%.
A few other examples that come to mind include Corporate Travel (ASX: CTD), Woolworths (ASX: WOW) and Sims (ASX: SGM) – although these results were accompanied by weaker-than-expected earnings, management changes and/or guidance downgrades.
The bottom line
Dividends are arguably one of the most important metrics for larger cap stocks. Missing dividend expectations can trigger both a knee-jerk and sustained sell off.
Investing for a "sustainable income stream" is a top priority across nearly every age group, according to the ASX.
A dividend miss not only reflects underwhelming or poor earnings but it can also trigger a domino effect of broker downgrades, advisors recommending clients to exit the stock, and a breakdown in technicals.
