Jupiter: Dividends in lockdown

April 2020

Dividends have gone into lockdown. As the world attempts to control the spread of coronavirus, companies are slashing or foregoing their dividends globally in an effort to shore up their capital. In Europe, the European Central Bank (ECB) has taken it a step further, ordering banks to pause all dividends and share buybacks, and there is a real possibility other central banks may follow suit. 

In March, £4.2 billion pounds of dividend payments were put on hold in Britain alone. However, this isn’t to say that every company has cut its payments. While some companies in industries were hit hard by the virus, such as tourism, retailers and airlines have already pulled their dividend payments, dividend deliverers remain in industries that are performing well in the current crisis. 

These are choppy waters for an investor to navigate. With this in mind, a selection of Jupiter’s income-focused fund managers give their view on the current dividend outlook: 

Markets globally are in unprecedented territory, with the fall we have just witnessed in March being the most severe fall of this magnitude in history. For many businesses 2020 is going to be an order of magnitude worse than the Global Financial Crisis and not witnessed in living memory.  Companies can plan for a recession - it’s tough but provisions can be made. However, this environment is much more extreme with many businesses facing prolonged periods without revenue.

In periods of stress, the number one thing companies do is fall back on their balance sheet to absorb the lack of cashflow. However, most companies have not designed their balance sheets to cope with this environment.  In our strategy we have always emphasised the importance of balance sheet strength (and a high conversion rate of profits into cash). We want businesses that don’t need to call on their equity shareholders to put up more cash. These companies are more likely to be able to emerge stronger. In 2008 the companies which emerged from the crisis stronger, were the ones which had the ability to enhance their positions and take advantage of the competition.  We have stress tested the portfolio and made some sales of businesses where the balance sheet can’t cope with this stress.

On Friday 27th March the ECB ordered eurozone banks to freeze dividends and share buybacks for the financial years 2019 and 2020. It is highly probable that the Bank of England will follow suit and implement similar measures. Over the past month we have seen c. 100 UK companies either cancel or suspend their dividend. We believe that many more companies will suspend or reduce their dividends this year.  We believe that this is prudent management and we fully support our companies cancelling or suspending dividends in this environment. Now more than ever a resilient balance sheet is vital, and as shareholders we will ultimately benefit from our companies strengthening their balance sheets by this means rather than new equity.

Dividends are discretionary. Companies in this climate have to make decisions about whether to cut or cancel them and so far the market isn’t punishing them for it. It’s also important to note that the increase in dividend cuts isn’t just a large cap issue – smaller companies are doing the same in an effort to bolster their capital positions.

If we look specifically at banks, I don’t think they should be paying a dividend in this environment.
For many banks, pay-outs to shareholders are a core pillar of their investment case over the long term but it is more prudent currently to focus on sustaining their business for the future. While banks continue to generate revenue now, no company is set up to operate in a possible world of zero revenue. The Government is doing what it can to support the economy and the banking sector has got to practice forbearance as well. If that means withholding dividends then I think that is sensible, especially when you consider banking’s role as the primary transfer mechanism, enabling the wider economy to stay afloat.  

From our perspective, as income investors, these are difficult waters to navigate. A huge number of companies have either cancelled, reduced or delayed dividends, even if already declared. In most cases they have managed to hold AGMs, by reducing the physical presence required to the absolute minimum and moving to proxy voting, but in some cases we have seen delays because they cannot manage the process. It is also worth bearing in mind that most European companies pay an annual dividend in one instalment, most often in April or May, so this necessary act of cash preservation is high on the agenda for them.

Inevitably, the situation remains highly fluid. There are likely to be further announcements in the weeks ahead, once companies have a bit more visibility on demand. Banks are clearly an issue. Some had already cancelled dividends unilaterally, pre-empting a move by the European Central Bank which has told banks in the eurozone to freeze dividend payments and share buybacks until at least October. Instead, banks are to support the economy using their capital to fund emergency credit lines as well as absorb a likely spike in corporate defaults. We only hold very limited exposure to banks, but we will watch this closely.

What we do not want to do is to let the ‘tail wag the dog’ i.e. let dividend yield dictate what we own. We have never done that. For us, dividends are about reaping the benefits of well-run businesses so we have always focused on solid cash generation, strong balance sheets and long term growth prospects. This matters now more than ever. At the margin, the huge sell-off in the market has created valuation opportunities and we have made a few moves to capitalise on this – if it improves the likelihood of actually receiving a dividend, so much the better, but we are mindful of chasing a yield  ‘mirage’. This is a rapidly unfolding situation and things may change so we reserve the right to change our minds, but broadly speaking, we do not envisage having to make significant changes to the portfolio. For all the short-term pain, we feel that we own a portfolio of robust businesses that ought to emerge strongly from this crisis.

Please note: Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested.  The views expressed are those of the individuals mentioned at the time of writing are not necessarily those of Jupiter as a whole and may be subject to change.  This is particularly true during periods of rapidly changing market circumstances.

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