Dubai: With a little over 900 companies worldwide having either cut or suspended their shareholder payouts so far, analysts warn of a bigger hit from the so-called high-yield dividend stocks this year.
With investors still reeling from the worst quarter for stocks since 2008, many are bracing for more pain as companies continue to slash dividend payouts in the face of a global recession.
Many invested in dividend-yielding stocks because they typically have safer returns. But with the onset of the virus pandemic, this is proving to be no more the case.
Scores of firms have now dropped their regular shareholder payouts to hold on to cash and protect their balance-sheets, as profits collapse and staff are laid off. Even stellar dividend paying companies in the energy sector have done away with paying cash back to shareholders for now.
Around 1,700 companies worldwide (large- and mid-cap) issue high-yield dividends — consistantly strong payouts to shareholders as a reward for standing by them. (Based on data from the FTSE global indices, which factor in 16,000 large-, mid-, small-, and micro-cap stocks, among a total of 41,000 publicly-listed firms.)
But because the pandemic has upended the global economy, shutting down factories and stores, companies are forced to throw out their profit forecasts and dividend payouts fell sharply. That only further added to the woes of beaten-down stocks that often relied on steady dividend payouts to compensate investors for less robust profit growth.
900 and counting
As of now, 596 companies have cancelled their dividend in March alone, according to data from ICE Data Services, and over half as much in the month that followed. In the US, the world's top economy, a little over 200 stocks have reduced or suspended their dividends, 44 of which are on the S&P 500 index.
Research showed that the number of companies that have suspended or canceled their dividends so far this year is more than in the past 10 years combined. And with economic uncertainty lingering, analysts warn the number could only grow.
Over 300 companies on the UK stock market have this year said they won’t be paying dividends for the time being or paying a much lower level than before. This figure includes 41 companies in the FTSE 100.
In the UAE, Emaar scrapped its 2019 payouts, being one among many developers in the Middle East’s business and logistics hub being forced to rethink projects as the pandemic and the oil-price collapse squeeze finances. The coronavirus is aggravating a long property slump in Dubai, where oversupply has pushed down prices for years.
Before the pandemic hit, it was estimated that total dividend payouts would hit $1.9 trillion in 2020, up from $1.4 trillion last year. Also, S&P 500 dividend payouts for the year were expected to top $500 billion to set a new record (and up from $485 billion in 2019).
Brokerage firms on average now estimate that dividends will decline by 25-27 per cent this year. That means investors could collectively lose $125 billion in dividend cuts on the S&P500 and $475 billion worldwide in this recession, on top of their losses from stock price declines.
The S&P 500 Dividend Aristocrats Index, which tracks shares of companies that have raised dividends every year for the past 25 years and generally is in line with the broader market, is down nearly 20 per cent. However, it has slightly recovered after dropping as much as 35 per cent in the past month.
The near-term goal of such cuts is to prevent these companies from going bankrupt, while also shoring up their balance-sheets if this shock becomes a far longer one than forecasted, analysts explain.
One place that is apparent is the real estate investment trust space, where tenants are struggling to pay their rent during the downturn and governments are moving to allow affected businesses to defer rental payments.
Businesses in the most affected sectors such as tourism and hospitality, aviation and retail are forced to cut or suspend shareholder payouts entirely for a period to preserve the viability of their businesses. Banks have been ditching payments - worth billions - too.
If earnings are hit, so will payouts
Dividend investing remains driven by payout ratios, which means the earnings cycle is important, and this year will clearly therefore be tougher as more companies issue weaker guidance and rethink whether their cash flow can support dividends.
At the same time, regulators concerned about making sure that enough capital is available to support the real economy are pushing back against banks and insurance companies continuing payouts.
ArcelorMittal likened the suddenness of the virus impact to the global financial crisis. While the steel industry has been hit because of curbs on production as governments battle to control the outbreak, the company is anticipating an easing of lockdown restrictions.
"It seems likely that over the course of this month countries will start to announce details of their "exit" strategies," ArcelorMittal Chairman Lakshmi Mittal said in a statement. "Whilst these are likely to be an easing, not an immediate ending of lockdown, construction and manufacturing are expected to be among the first sectors to be permitted to re-start operations and indeed we are seeing signs of customers re-starting production."
* UK's BT Group scrapped dividends for two years after the coronavirus dashed hopes of a return to growth next year and it set aside more cash to accelerate a national fiber network rollout. Its shares tumbled as much as 12 per cent.