The outlook for value remains bright
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Over the past 100 years, there have been at least four periods when dividends have fallen sharply. During the recession after World War One and the Spanish Flu pandemic, dividends fell by around 35%*. After the Great Depression in the 1930s, they fell by 55%* and by 50%* after World War Two. During the more recent global financial crisis they fell 25%*.
With some company cashflows completely destroyed by the global economic shutdown and regulatory, political and societal pressure coming to bare, dividends will also fall significantly in 2020. The big question is: by how much?
We take a look at the outlook for pay-outs across different regions:
Schroder Income co-manager Nick Kirrage points out that the UK’s dividend yield was already elevated and unsustainable even before the crisis.
And, rather depressingly, John Chatfeild-Roberts, co-manager of Jupiter Merlin Income fund, believes that total UK dividends could be cut by some 50-55%. He said: “By mid-April 28 FTSE 100 companies had already cancelled their dividends and 10 more had been suspended.
“We think it will be a permanent cut, as companies rebase dividends and increase dividend cover. After the Great Depression it took until 1957 (25 years) for dividends to return to pre-crisis levels in inflation-adjusted terms. We could have the same wait again.
“Mindsets need to change, and I think ‘sustainable’ dividends will be more important than high dividends going forward.”
“If we drill down further to a sector level, we see significant dependence on oils, banks and mining, which accounted for around 50% of dividends paid in 2019,” added David Keir, Chief Executive Officer of Saracen Fund Managers. “Indeed, the fifteen largest dividend paying companies accounted for 64% of total UK dividends.”
With rock bottom oil prices contributing to Royal Dutch Shell’s first dividend cut since World War Two and banks having been told not to pay dividends, the outlook is indeed quite bleak, especially amongst the UK’s larger companies.
Read more about GAM UK Equity Income, which has around 45%** invested in small and medium-sized companies
Dan Roberts, manager of Fidelity Global Dividend, believes that European dividends are the most at threat. But points out that the region does still yield twice as much as the US.
Matthew Page, co-manager of Guinness Global Equity Income, agrees. He said: “Along with the UK, Europe will be worst hit, due in part to the fact that they both have high exposure to large banks.
“I expect dividend cuts of around 50% in France, where political pressure for companies not to pay dividends is strong. Italy will probably see around a 40% cut, but Germany and Switzerland may hold up better due to the nature of their dividend-paying companies – the latter has a large pharmaceutical presence for example.”
Artemis Monthly Distribution co-manager Jacob de Tusch-Lec added: “Germany and Switzerland are less sensitive to cuts thanks to the make-up of their markets, so are continuing to pay. France has more of a blanket ban.”
Timing is also an issue, as David Keir, explains: “The issue is made slightly more complex given that European companies tend to make one dividend distribution per annum, which unfortunately tends to be paid in April/May. We are seeing many European companies delaying their AGM’s until the summer in the hope that they can still pay a dividend later in the year.”
The US market has a lower yield than the UK and Europe at around 2%***, but it is home to a number of dividend aristocrats – companies that have increased dividends every year for the last 25 consecutive years.
Jacob de Tusch-Lec said: “In the US the political pressure is more on stopping share buy backs so, if anything, it makes the dividends safer.”
Matthew Page agrees: “The US is less affected as it has a lower pay-out ratio and there is currently zero regulatory pressure on banks. My only area of concern would be the Real Estate Investment Trusts as some tenants are withholding rent, so they could be forced to cut.”
Read more about JPM US Equity Income fund
Matthew Page continued: “In Asia, companies tend to pay out what is available, rather than intentionally focusing on dividend growth, so this region is more volatile in terms of dividend payments anyway.”
Fidelity Asian Dividend manager, Jochen Breuer, thinks China is quite resilient. He said: “There has been a particular focus among companies from mainland China, specifically those that count the state as a major investor, on increasing dividend pay-outs in recent years. This follows sustained calls by the government to increase shareholder returns.
“China’s securities regulator has also repeatedly called for greater rewards for shareholders in the form of dividend payments, as the government seeks to encourage fundamental investing as part of a drive to reform the stock market.
“Generally, state-owned enterprises (SOEs) with strong cashflow are more likely to heed the call. Many of them still have strong balance sheets this year that allow resilient distributions. Nevertheless, profit outlooks for Chinese companies in general remain challenging. Many other Chinese firms with weak cashflows are cutting or suspending dividends, just like their global peers.”
Japan is also another bright spot according to John Chatfeild-Roberts. “Companies have lower payout ratios and some 55% of non-financial companies listed on the Japanese stock market had net cash going into this crisis, so they have better balance sheets. I expect cuts to be lower than other regions at about 33% or less.”
Read more about Baillie Gifford Japanese Income Growth
Country allocation obviously matters as much as sector allocation in these times. And, as Dan Roberts said: “It’s not enough to work out if a company is capable of paying and willing to pay a dividend – you also need to consider the political regulatory and societal pressures.”
It’s inevitable that dividends will fall substantially. But it’s important to remember that dividends won’t disappear completely: some 50%+ of companies will still go ahead with dividend payments as planned. Some may even increase them.
What is certain is that funds with good stock-picking managers will be crucial for investors relying on dividends to supplement their income.
* analysis is based on the S&P500 where the best data is available
**Source: fund fact sheet, 31 March 2020
***Source: ycharts.com, 30 April 2020