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Will Dividends Experience a V-Shaped Recovery?
While not as dramatic as during the global financial crisis, dividends in 2020 have taken a hit: Dividends globally declined some $108 billion to $382 billion in Q2—a 22% YoY drop. An estimated 27% of companies globally cut their dividends, including more than half of European companies. In the UK, 176 companies canceled dividends altogether. The story is slightly different in the US: During the GFC, S&P 500® Index companies’ quarterly dividends fell some 25% (based on the ETF’s dividend)—compared to only 5.6% during the pandemic through the first week of September 2020. Regardless of the magnitude, though, given the dramatic spike in uncertainty, the seemingly self-preserving response isn’t terribly surprising.
What’s different about this round of dividend cuts is the breadth of sectors impacted. Obviously financials firms were particularly hard-hit in 2008-2009 as they sought to not only preserve capital amid a massive bear market and accompany recessions, but also to respond to increased regulatory scrutiny from governments globally. This year’s pandemic and governmental responses—economic lockdowns and others—seem likely to have further-reaching impacts. Indeed, 8 of 12 sectors are expected to see EPS fall this year—led down by energy, industrials and consumer discretionary. Which could incentivize some to cut dividends in an attempt to maintain guidance.
Regardless, it seems likely many companies will restore dividend payments as uncertainty increasingly fades—though we’d expect with divergence among sectors, industries, even geographies. For example, hotels and airlines seem likely candidates for cuts, while technology companies may be able to continue paying dividends for the crisis’s duration.
Interestingly, companies aren’t universally hesitant to spend money—indeed, data indicate S&P 500® Index companies repurchased shares in Q2, despite collapsing profits. As sentiment improves and the outlook clears, it wouldn’t be surprising to see share repurchases strengthen further.
Even if 2020 is the year of the dividend cuts (among ample other possible monikers), it’s worth noting the dividend yield remains more attractive than the majority of global benchmark bond yields—like the US 10-year Treasury, which as of this writing yields some 73bps. Relative to other major developed world markets—Germany, the UK, Japan—that’s a generous yield. Just one more reason the current backdrop makes many equities seem more attractive than government bonds.
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