During my interview yesterday with Andrew Thorburn, the CEO of NAB, he started talking about the coming competition from Google, Facebook and Amazon. He mentioned those three by name.
We had been talking about the sustainability of NAB’s dividend, which was 79% of cash profit this year and more than the declared net profit.
“We’re hoping to maintain it for the next 12 months,” he said, to which I responded that that’s not exactly a rock-solid, long-term promise, to which he might have responded, but didn’t, that a dividend is never a promise, what made you think it was?
I then pointed out to Andrew Thorburn, Google, Facebook and Amazon, the companies he had just named as his key future competitors, don’t pay dividends, they just invest in artificial intelligence. They don’t even really declare much of a profit, because most of the investments in AI etc. are not capitalised but expensed.
NAB is also talking about investing in AI, but with 80% of its cash profit going out in dividends, isn’t that just talk? Especially when you’re competing with Google, Facebook and Amazon, as he is now talking about as well.
He makes a good point that NAB has a good business, and an excellent relationship with its customers (despite appearances to the contrary, and apparently poor relationships with politicians) so it won’t be easy for foreign competitors to break into that.
But here’s the question for income investors: in a world of globalised technology, in particular artificial intelligence, as well as rising interest rates (eventually) – is investing in high yielding companies a guarantee of zero capital growth, or even decline?
I don’t know the answer, and I’m certainly not making any kind of dramatic prediction on that score, despite the rather dramatic headline. We are not yet in a post dividend world in Australia.
But 75-80% payout ratios are going to be harder to maintain. The problem is that while many companies have been immune from the challenges of globalisation and robotics up to now (banks for example), every company will be affected by artificial intelligence, and will need to invest.
As a rule of thumb, companies paying out much more than 50% of cash flow in dividends might have to rethink, over time.