As multiple forces challenge shareholder-first mindset, income seekers and re-investors must review their approaches
Being a shareholder isn’t what it used to be. Between recent scrutiny surrounding stock buybacks and the financial pressure inflicted upon many companies by the coronavirus crisis, it seems shareholders should expect fewer perks to come their way — and that includes dividends.
Citing the Janus Henderson Global Dividend Index, the Financial Times reported that investors could lose up to US$490 billion of dividend payments in the full 2020 calendar year as many companies suspend their dividend payments.
“These suspensions impact portfolios by way of lower income received and usually by share price depreciation too,” Simon Pinckney, managing director at wealth manager Hassium, told the Times.
In a lot of cases, the decision to suspend dividends stemmed from a catastrophic collapse in earnings or severely worsened market outlook. Companies that receive financial aid from the government must also consider a potential backlash if they’re perceived to be using the money simply to benefit shareholders.
“It is clear that markets have not yet anticipated the impact that regulatory pressure will have on dividends,” said Alexandre Tavazzi, global strategist at Pictet Wealth Management.
With those factors in mind, investors that stand to lose their dividends may have to consider tweaking their portfolios accordingly. In the case of those who really need the regular income, that could mean pivoting away from companies that face heavy debt or regulation, such as airlines or banks.
As for those using dividend reinvestment plans, continuing to use the income to add to their holdings could be a smart move, as some experts maintain that certain holdings could recoup their value as it becomes clear which names made prudent dividend cuts and which ones were forced to do so out of weakness.
“[M]any of the dividend cuts witnessed in recent weeks have been made preemptively to retain future flexibility,” Duncan Burden, head of research at Stamford Associates, told the Times. “The cuts do not necessarily reflect lasting impacts on their business models.”
Instead of automatically recoiling at the news of dividend cuts, Burden said investors should watch out for precariously positioned balance sheets. In particularly, he warned companies that have taken on certain debt covenants might find themselves chained to capital structures that, in the context of the COVID-19 pandemic, cannot be sustained.
“Any amount of debt on an earnings base approaching zero may put perceptibly more ‘defensive’ businesses at risk of a covenant breach,” he said.
