How will COVID-19 affect dividend payments?

COVID – 19 has almost completely shut down certain industries, and we are already seeing companies forewarn that there may be flow-on effects to dividend payouts.
As many investors look to deploy cash into the markets while prices are low – it is important to think ahead beyond the next 6 months to your liquidity needs.

Dividends likely affected – buy recovery expected

The COVID – 19 induced shut down has sharply reduced short term demand for a wide range of good and services as well as disrupting manufacturing supply chains.
Over half of ASX200 companies have downgraded or withdrawn future earnings guidance due to the unknown duration of the COVID–19 outbreak.
This will put pressure on companies to reduce/withhold dividends for the following reasons:

1. 1. Balance sheet / Liquidity stress
      Companies with a lot of debt or operational gearing could see major pressure on profitability and even solvency as a result of this unforeseen disruption.
      Cancelling or delaying dividends is seen as a preferable way of shoring up the balance sheet over forced capital raisings, which are both costly and has a dilutive effect on existing shareholders.
      Estimates are that $14 billion of dividends which were announced will not be paid, with $450 million’s worth cancelled, and $540 million worth delayed.
      The longer the COVID – 19 saga continues, the more this trend is likely to continue.
   2. Earnings downgrades
      The rapid extreme equity market fall has indicated the extent investors predict company earnings will be affected due to the global slowdown.
      As the number of global COVID–19 cases rise, the more markets will price in the effect on company earnings.
      Dividends generally rise and fall in line with earnings per share. It is estimated that the market has only revised dividends per share down 5% from the 20 February 2020 peak, so further dividends per share cuts are highly likely.
   3. Reduced payout rations and conservatism
      As with the 2008 GFC, a major event like this gives company boards the opportunity to rebase dividend expectations to a level that creates less pressure in the future.
      Payout ratios have been rising since 2010, driven by investors demand for dividends in the very low-interest rate environment.
      While did not reach the pre-GFC highs, with current payout ratios for industrials at around 77%, so there is still significant downside risk from here.

   Be prepared – look to the next 12 months

   We always want to stay ahead of the ball where possible, and so now is the time to prepare for reduced portfolio cash flow, to reduce the need to be forced to sell down capital in a down market.
   You may want to consider the following:

   • • Allocated Pension drawdowns: Consider that the end of the financial year is approaching and ensure there is sufficient cash to meet your minimum drawdown.
       Note that the government has temporarily reduced the minimum required drawdown by 50% – speak to us If you would like to discuss
     • Cash need/Major expenses for the next 12 months: Now is a good time to assess your likely cash needs or one-off expenses.
       We can come up with a plan to meet your liquidity needs together. It is better to put a plan in place now than to be forced to sell capital.
     • Consumer staples cost increase: We have seen some significant cost increases in supermarkets due to the short term jump in demand as people panic buy. Luckily this has been offset by not being about to spend money on almost anything else discretionary, however, the longer this event draws out, the more we could see the costs of the basics rise.
     • To invest cash or hold back: The recent market drop is providing a once in a decade buying opportunity, and it is very tempting to jump in to try and ride the eventual recovery. If anything you may want to consider increasing your regular cash reserve in expectation, that dividends may not supplement your regular income in the short term.

   Conclusion: Better to be over-prepared than over-confident

   The main thing to remember is that we have not been through such a significant global pandemic in recent history. Given how much change the world has been through since the last major event such as this, the timeframe for recovery is completely unknown. There is a lot of talk of predicting the shape of the curve of infections – however, the harder thing to predict is the return of consumer and investor confidence and discretionary spending. One of the hardest hit sectors is small to medium business, which make up a very significant portion of the economy. Although a swift post-pandemic recovery is still certainly possible, it is important to make calculated and informed decisions and plan ahead for all possible scenarios.

   On a positive note, we have seen a great global co-operation in combating this especially hard time. We have seen the people really band together to help one another and support the especially vulnerable. With that in mind, we won’t be surprised at all if we see this continuing support for one another to continue just like it did during the terrible bushfires we saw only a few months ago.

   If you would like to discuss your situation, please do not hesitate to email us or contact us on (08) 8172 9111.