Fund managers expect more companies to cut their dividends, following the example set by banks. However, many companies still are perfectly capable of maintaining their dividends, according to DPAM’s Laurent van Tuyckom.
‘Companies in defensive sectors such as healthcare, utilities and telecom are currently hardly affected by the corona crisis. It would be inappropriate to require these companies to reduce their dividends, because they can still easily afford to pay them,› says Van Tuyckom, manager of the DPAM Equities Europe Dividend Fund.
The Italian utility Enel, for example, announced last week that it would increase its dividend by 20%,› adds Jorik van den Bos, manager of the Kempen Global High Dividend Fund. ‘The French car leasing company ALD also explicitly confirmed on Friday that they will pay out a 9% higher dividend for 2019.’
And even some banks could afford to pay dividends, Van Tuyckom argues. Such as Van Lanschot and KBC. ‘In principle, they are able to maintain their dividend payments even in a downward cycle. They did not even need the recent reduction in capital buffers, for example.’
However, the ECB probably saw some badly capitalised banks could get into trouble if they insisted on paying dividends and risk losing their ability to provide credit to companies in need. ‘They may have wanted to prevent this by announcing this moratorium on dividends,’ Van Tuyckom believes. ‘The ECB wanted to maintain a level playing field in this respect, which is why I think it announced a total ban,’ he adds. ‘In a way, the stronger banks have been sacrificed in favour of the weaker ones›.
Van Tuyckom entered the corona crisis with an overweight to cyclical value stocks. As a result, his fund has been hit hard in recent weeks. ‘DPAM dividend funds invest in companies with a higher than average dividend pay-out. Quality growth companies no longer pay out large dividends, so over the years we have increasingly had to consider more cyclical companies›, he explains. And many of those companies are under pressure to reduce their dividend payments or even eliminate them altogether for the time being.
In the eye of the storm
‘We’ve indeed seen companies reconsider their dividend payments in recent weeks,› says Van Tuyckom. ‘You have to make a distinction between three groups. Next to the banks, which have been forced to suspend their dividend payments, there are cyclical companies that have seen their visibility deteriorate as a result of the crisis. One example is BASF, which has announced that it will review its dividend payment for 2019.’
Finally, there is a group of companies in the eye of the storm that often also make use of government funding. ‘For those companies, such as IAG, Easyjet or TUI, it would indeed make sense if they stopped paying dividends for the time being.’
This last category of companies is rapidly growing in size. On Monday, for example, the German government announced that companies wishing to benefit from state aid would have to suspend their dividend payments.
‘Even companies with business models that are normally able to withstand a recession will have to pay close attention to their cash position in the coming weeks. That’s why we expect more companies in our portfolio to reduce their dividends,› Thomas Schüssler, manager of the DWS Top Dividers fund, comments by email. Schüssler also reports that he has sold his position in ‹a bank in the eurozone›, and further reduced his already low exposure to industrial companies (4.5% at the end of February).
Oil companies under pressure
Van Tuyckom has also been taking action. Among other things, he has lowered his allocation to the severely affected oil and gas sector. ‘In that sector, most companies pay their dividends directly from their cashflows. Exploration companies and suppliers in particular are now being hit hard, and some of those companies are already planning to distribute less cash to shareholders,› he says.
Oil majors like BP, Shell and Total are now also in the danger zone. On Monday, Shell secured a new credit facility worth $12 billion. Investors see this as a signal that the company wants to hold on to dividend pay-out and sent the company’s stock up 6% on Tuesday. ‘Ultimately, it will depend on how quickly the oil price recovers whether oil and gas companies will be able to hold on to their dividends. If it stays very low for a longer period of time, it will become more and more difficult. But the situation really differs from company to company›.
The big question is, of course, whether companies that ‹defer› dividend payments now will pay these withheld dividends later on. ‘If the situation of banks does not deteriorate much from here, I don’t see any reason not to pay suspended dividends in, say, 6 months’ time’, says Van Tuyckom. ‘But if their capital ratios deteriorate and the share of non-performing loans increases, it becomes a different story.’
DWS’s Schüssler agrees. ‘Depending on the rate of improvement of the Covid-19 situation, companies might also choose to stop paying a dividend in H1 but elect to pay the amount in H2 if the situation allows for it.’