SYDNEY (Reuters) – Investors are hoping for generous dividend payouts as some of Australia’s biggest companies look set to report profit declines this month, and will punish underperformance in a market trading at record highs, fund managers and analysts said.

The prospect of across-the-board earnings disappointment in a frothy sharemarket puts the spotlight on capital return as investors look to justify paying prices that are being pumped up by the lowest interest rates in Australian history.

“Companies that disappoint on earnings where it hasn’t already been built into share prices will get hammered,” said Nathan Bell, head of Australian equities at InvestSmart.

“Given the lack of investment options many companies have … it should be a good period for dividends.”

The recent sharemarket peaks are a side-effect of Australia’s fragile economy, now growing at the slowest rate since the global financial crisis due to a house price correction and stagnant wages growth.

A federal election in May, U.S.-China trade tensions and political turmoil in Britain have deepened the sense of trepidation that has stalled business spending. This has prompted the Reserve Bank of Australia to cut interest rates twice, flattening bond yields and making it cheaper to borrow to buy shares.

But the rate cuts are not seen translating to profits: 11 of the country’s 20 largest companies are forecast by analysts to report a decline in annual profit in 2019, more than double the five top-20 companies which reported lower profit the previous year, according to Refinitiv data.

In the months leading up to reporting season, downward adjustments to earnings guidance have outnumbered upward adjustments seven to one, said Andrew Tang, equity strategist at Brisbane-based stockbroker Morgans, in a note.

Market heavyweights like mining-to-retail conglomerate Wesfarmers Ltd (WES.AX), telecoms giant Telstra Corp Ltd (TLS.AX) and gas station operator Caltex Australia Ltd (CTX.AX) have issued earnings downgrades in recent weeks (Caltex reports half-year results).

The sharemarket has risen more than a fifth since the start of 2019, blowing out the price-to-earnings ratio of the S&P/ASX 200 to about 18.5 by late July, from less than 15 in December. The PE ratio is a measure of how expensive a company’s stock is in relation to its profit.

“High prices have to be met by reality, and if the reality does not eventuate the high prices will correct,” said Jason Teh, chief investment officer at Vertium Asset Management.

Some analysts have said reports of a stabilizing property market suggested cheap interest rates were putting more cash into the economy – which eventually would end up as company profits.

“We could be at a bit of an inflection,” Citi equities analyst Tony Brennan told a media briefing in Sydney.

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