Ben Lofthouse, Head of Global Equity Income, and Jane Shoemake, Investment Director, assess the outlook for global dividends given the wide-reaching implications of the COVID-19 pandemic.
- COVID-19 has resulted in a demand and supply shock to the global economy, with dramatic implications for gross domestic product (GDP) growth, corporate profits and dividends.
- Approximately 60% of global dividend-paying companies are cyclically exposed, and dividends paid by these types of companies will be under pressure. However, around 40% are likely to be more defensively positioned and their dividends should be more resilient.
- Looking further ahead, we could see dividend payments from several sectors resume in 2021 (albeit from a lower base level), provided the growth in virus cases looks to be peaking, the current government-enforced lockdowns end and the global economy starts to function and recover.
The COVID-19 pandemic is a humanitarian crisis, with governments around the world struggling to slow the spread of the virus. It has resulted in both a demand and supply shock to the global economy, with dramatic implications for gross domestic product (GDP) growth, corporate profits and dividends. The government lockdowns implemented around the world have severely impacted the leisure, tourism, airline, retail and construction sectors. Businesses of all sizes have had to quickly adapt to the fast-changing environment and a sudden loss of revenue.
Given the pressures on revenues, cash flow and profits, a number of companies have already announced that they will be suspending dividend payments this year, and we expect more to follow. We have seen a significant number of cuts in the UK and Europe ex-UK, two of the higher dividend-yielding regions of the world, while lower-yielding regions such as the U.S. and Japan, alongside Asia, have been relatively unaffected so far. The U.S. accounts for approximately 40% of all dividends paid globally, so the upcoming U.S. reporting season will be an important indicator of the impact of the crisis on the quarterly U.S. dividend payment cycle.
Based on previous findings from the Janus Henderson Global Dividend Index1, a study into global dividend trends, around 60% of global dividend-paying companies are cyclically exposed, and dividends paid by these types of companies will be under pressure. However, around 40% of companies globally are likely to be more defensively positioned and, as a result, their dividends should be more resilient despite the challenging environment. This includes sectors such as utilities, consumer staples, communication services, technology and health care.
During the Global Financial Crisis (GFC), global dividends fell by almost 30%2 from peak to trough, with earnings down around 60%3. This happened over a 15- to 18-month period, whereas the current crisis has evolved in just three months from when the first case was reported in China at the end of 2019. We believe that consensus earnings and dividend expectations globally remain too high and will be subject to significant downgrades in the coming weeks. Dividend cuts or suspensions are likely to continue as companies look to conserve cash in an attempt to survive. In Europe, annual general meeting delays, along with regulatory, political and societal considerations, have resulted in unprecedented pressure on dividend payments.
In recent days there have been several instances where companies have suspended dividends, even though they have strong balance sheets and sufficient cash to pay. This highlights the social and political considerations that boards and senior management currently face. It could be hard for companies in some parts of the world and some sectors to justify paying dividends to shareholders while also accessing government-backed business loans or employee payment schemes. The key question will be how quickly these companies can return to paying dividends once the crisis has subsided. There has been an enormous amount of stimulus applied around the world at a much earlier stage in this crisis than in the GFC, and in some cases companies have cut their dividends out of prudence and political consideration rather than necessity.
It remains difficult to accurately forecast the likely scale of dividend cuts globally in 2020 given the highly fluid and developing situation. Looking further ahead, we could see dividend payments from a number of sectors resume in 2021 (albeit from a lower base level), provided the growth in virus cases looks to be peaking, the current government-enforced lockdowns end and the global economy starts to function and recover.
Given the current environment, we believe that it is more important than ever for income investors to be diversified both geographically and by sector while remaining focused on assessing a company’s free cash flow and its ability to pay its dividend. Given recent stock price falls, there are now some high yields on offer, but in a number of cases these yields look unrealistic with the market already discounting a dividend cut. It will therefore be critical for investors to avoid these value traps, and we think an active approach to stock selection will be key.
1 Janus Henderson Global Dividend Index, Edition 25, February 2020
2 Refinitiv Datastream, based on annualized MSCI World dividend growth data, 4/3/20
3 Citi Research, 3/18/20
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