By Greg Peel

Previously, Australian companies have been allowed under the Corporations Act to pay dividends provided they are paid out of profits. For listings such as infrastructure trusts, the addition of a “stapled security” to a trust unit overcame this test, such that dividends could be paid out of cashflows despite the trust actually showing negative earnings prior to projects being completed.

That's all about to change. Among the various regulatory responses to the GFC has been the passage of new laws through parliament which shift focus on dividend payment permission from the issue of profit to the issue of solvency. Having passed both houses, the new law is only awaiting Royal Assent. If assent is granted prior to midnight tonight, being the end of FY10, then the new laws will apply to FY10 accounts.

In simple terms, companies must now satisfy three criteria in order to be allowed to pay dividends. Firstly, a company's assets must exceed its liabilities prior to a dividend being paid and by an amount in excess of the dividend payment. Secondly, the payment of a dividend must be deemed fair and reasonable for shareholders and the company's future. Thirdly, a dividend payment cannot prejudice a company's capacity to pay its creditors.

The latter rule ensures that a company cannot pay a dividend to equity holders who rank below creditors in the case of a wind-up and then wind up the company leaving higher ranking creditors out of pocket.

For tax purposes (ie franking), the ATO has also introduced new laws to match the changes to the Corporations Act.

RBS Australia has decided to run some preliminary testing on known company accounts to see just what impact the rule changes may have to capital management policy. The analysts suggest that the first impact will be simple uncertainty in the market and some companies possibly being caught out before fully understanding and adjusting to the new rules, particularly if they come into effect for FY10.

RBS has used two test criteria, one in which total assets exceed total liabilities and one in which current assets exceed current liabilities using last actual reported numbers. The analysts are quick to point out this is only a demonstration of possible impact of the new rules, and not a test to see which companies will end up paying lower or no dividends.

The companies the analysts conclude might be negatively impacted by the new rules are Brambles ((BXB)), Aristocrat Leisure ((ALL)), Flight Centre ((FLT)), Tabcorp ((TAH)), Sigma Pharmaceuticals ((SIP)), Incitec Pivot ((IPL)), Fairfax Media ((FXJ)), FKP Property ((FKP)), The Reject Shop ((TRS)), Wotif.com ((WTF)), Telstra ((TLS)), Qantas ((QAN)), Transurban ((TCL)), APA Group ((APA)), Envestra ((ENV)) and Spark Infrastructure ((SKI)).

On the flipside, companies which previously have not been able to pay dividends under the old profit rule may now be able to choose to do so under the new solvency rules. Hence the companies RBS conclude might be positively impacted by the rule change are Atlas Iron ((AGO)), Elders ((ELD)), Eastern Star Gas ((ESG)), Iluka Resources ((ILU)), Paladin Energy ((PDN)) and Perseus Mining ((PRU)).

As a final note, RBS suggests the accompanying tax law changes could mean that if the new dividend rules facilitate a broader and larger range of dividend distributions, an accelerated distribution of franking credits may follow. But the analysts have not yet sought ATO advice on this matter.

While on the subject of tax, obviously much anticipation currently surrounds the potential concessions set to be granted by the new Gillard government with respect to the proposed Resource Super Profits Tax policy. One expected concession is an increase in the augmentation rate from 5.5% to 11%, and another is a shift from one all-encompassing RSPT to differing tax rules for different commodities.

Australia already has a not dissimilar Petroleum Resource Rent Tax in place for the energy sector, and under the initial RSPT proposal energy companies already paying the PRRT were to be offered a choice of paying the less onerous of either the PRRT or the RSPT but not both.

While offshore LNG projects come under the PRRT system, new CSM LNG projects would come under the new RSPT system if the current proposal went ahead. However, it is anticipated the government will now concede to allowing CSM LNG to pay PRRT instead of RSPT.

JP Morgan analysts suggest this would represent a significant win the CSM LNG projects, given the PRRT burden would still be less even if the RSPT augmentation rate is universally raised from 5.5% to 11%. Significant in that companies looking for equity partners for their CSM projects can at least indicate a “worst case scenario” now of the PRRT.

As oft noted by government spokespeople, the initial proposal to introduce a PRRT by the Keating government met with the same hysterical protest from the energy industry as the RSPT has prompted from the mining industry. But it never stopped foreign companies investing heavily in Australian energy projects.

JP Morgan suggests Santos ((STO)), for example, will be able to source equity partners for its GLNG project once this concession is granted and that BG will lift its deferral of a final investment decision on QCLNG as well.

Moving over to Australia's other major sector, Morgan Stanley suggests the market is underestimating the risk of the current threats to earnings in retail banking. Current threats include National Bank's ((NAB)) new price-based and reputation-focused strategy, as yet to be determined regulatory tightening, competition amongst banks for deposits given offshore funding pressures, less scope in the current environment to lift variable mortgage rates regardless of RBA rates, the forced reduction in “exception fees” (ie bounced cheque fines etc), new pressure to reduce mortgage exit fees, and lower fees on transaction accounts.

Add that all up, and Morgan Stanley suggests the downside risk to bank earnings is not being fully appreciated by investors.

In terms of relative exposure to such risk, the analysts note retail banking accounts for around 22% of group profit for NAB, 33% for ANZ Bank ((ANZ)), 42% for Commonwealth Bank ((CBA)) and 46% for Westpac ((WBC)).

Morgan Stanley recommends an Overweight on NAB, given it has the lowest retail exposure and its earnings expectations have already been lowered by the market, and an Underweight on CBA given its high retail exposure plus what the analysts consider to be “optimistic” consensus earnings forecasts from the market.

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