Dividends have moved in all sorts of directions in this crisis, but the common theme has been in the wrong direction to satisfy dividend hunters. Not all cuts are the same, however. Below is a spotters’ guide I have compiled to the variety of dividend payers in a crisis. It’s mostly based on examples from this crisis, but don’t worry if you’ve missed out thanks to your excellent stockpicking or portfolio skills – the guide will still be good for the next crisis, and the one after that.
The Rare Spotted Riser: Dividends Up as Usual
In a time like this, the attraction of consistent dividend raisers takes on a practical dimension. Such companies have glided through the crisis and raised their dividends as normal. Spirax-Sarco (SPXSF, SPXSY) announced its dividend would rise, as it has every year for half a century. That’s a key reason why companies like Spirax-Sarco attract high valuations.
The Not so Swift: Dividend Paid But Held Flat
In the U.S., companies are known as dividend aristocrats if they have increased their dividends for at least twenty five years. But if a company is paying a dividend quarterly, it could hold the dividend flat for six quarters and with a last quarter increase still maintain its title.
Exxon (XOM) normally raises its dividend in the second quarter, but this year did not. It may raise it in a later quarter to hang onto its record of dividend rises thirty seven years on the trot.
The Back Wader: Dividend Suspended but Paid Later
The U.K. insurance sector hasn’t covered itself in glory in this crisis, taking a “cautious” approach under heavy regulatory pressure and suspending dividends. Legal & General (LGGNF, LGGNY) paid as usual, but others suspended their dividend.
I think that’s problematic because if insurance companies can’t assess their own risks and plan accordingly, how can they make a living out of it?
These suspensions really were suspensions and not disguised cancellations. Direct Line (DIISF, DIISY, DIISD) and Admiral (AMIGF, AMIGY) have both recently announced that they would retrospectively pay the suspended dividends, as well as their normal dividends, boosting their share prices with the announcements. So while income streams have been disrupted the income has still turned up belatedly. That’s not just insurers: paper maker Smurfit Kappa did the same, as did shipbroker Clarkson, and a lot of other companies who haven’t had much negative impact from the crisis ought to be considering the same.
There is a short-term opportunity in this for some names, by the way: a burst of dividends and a bump with the news that dividends are back.
The Albatross: Dividend Cancelled by Command
As a board assessing the potential impact of a crisis but with an army of dividend hungry retail investors, the closest to divine intervention could be a tap on the shoulder from a regulator telling you not to pay dividends. What sort of regulator might do this? Step forward the Bank of England, which arched its collective eyebrow very firmly such that British listed banks knew to pass on their dividends this year.
The Bank’s regulator even reportedly warned banks that “it stands ready to consider use of our supervisory powers should your group not agree to take such action.”
Even banks like HSBC (HSBC, HSBC.PA) and Standard Chartered (SCBFF, SCBFY), who do most of their business elsewhere but are listed in London, stopped dividends as a result.
I don’t think that’s an appropriate response for a regulator in a free market and feel the Old Lady of Threadneedle Street greatly overstepped its wicket on this one. For shareholders, I think it’s doubly bad: not only are dividends cancelled for now, but hiding as a herd under the protection of an interventionist edict is likely to make management more complacent about accountability for their companies’ performance in handling the crisis.
An opposing view to mine could say that the banks cocked it up so badly last time around (in the financial crisis) that the regulator here is protecting their shareholders’ interests by helping them maintain capital when the economy is set to tank. However, that’s an example of one of the critiques levelled at lot of regulators, that they are always solving the last crisis not the current one.
The Diving Duck: Dividend Cancelled But not for Long
Don’t panic, Mr. Mainwaring!
Some companies cancelled dividends as part of a general and unbecoming frenzy in the Spring, but with business not badly affected (or actually benefitting) from the way events have turned out, that was a one-off and it’s now back to dividends as normal.
British housebuilder Persimmon (PSMMF, PSMMY) has a good dividend history and having cancelled an interim dividend and postponed a final has now moved to restore dividends.
They are at a lower rate than before, but it’s still a restoration. Will they climb to former levels in due course, or will they resettle at a lower level? In every crisis, some companies cut dividends or suspend and restore them at lower level (as Persimmon has done) and gradually increase them in the following years, while others cut with no intention of returning to their former level any time soon…
The Camouflaged Lark: Use the Chaos to Make a Dividend Cut
Companies with a large cut to make can benefit from the camouflage cover provided by general market meltdown.
Shell cut its dividend for the first time since the war. There was big disruption in the oil market, but that had been true in the Suez Crisis, the oil crisis, the Gulf War and other occasions, all of which its dividend survived unscathed. Now it lost two thirds of its heft. That in turn provided cover for sectoral peer BP (BP, BPAQF) to cut.
I’m not here getting into whether these cuts were the right thing for the business in terms of substance. But in terms of timing and behavioural consistency, a general market crisis provided cover for these moves.
The Hibernating Poorwill: Initial Dividend Cut Lasts a While
I’m no ornithologist, clearly, but I understand that the common poorwill can enter an extended period of hibernation as a means of surviving harsh conditions, uniquely in the aviary world.
I don’t accuse the directors of certain types of U.K. consumer goods and services of poorwill, but their dividends have gone into what I expect to be a two or three year hibernation in some cases. Consider Greggs (GGGSF, GGSY) or Stagecoach (SAGKF, SAGKY) as an example. In 2020, the Spring dividend was suspended, not to be paid later, and with the businesses in deeply problematic operating conditions, the Autumn one will go the same way. But 2021 will be the same. Having booked losses in 2020, the companies will be struggling with customer demand well into 2021 even on optimistic forecasts, while the financial priority will be repairing the damage caused to balance sheets in 2020, not paying out dividends which the shareholders will have grown less accustomed to receiving. Only when demand has reached a new, profitable, equilibrium, and some final resilience is restored, would I expect responsible companies to declare a dividend.
So while some companies have a bad quarter or two, and dividends make a brief disappearance, others will have a bad six to twelve months of lower revenue and new costs, and the next one or maybe even two years will be needed to cover the gaps that has caused to open up in their financial position, before getting onto thinking about dividends again. I see this as a particular risk for companies directly exposed to consumer spending with a fixed cost base, such as high street retailers, restaurant and hotel chains, travel companies and transport providers.
The Dodo: Goodbye Dividends, Forever
Sometimes dividends go in a crisis but don’t return with normality, or the new normality. For an example, let’s step back to the last two crises for a moment.
J. C. Penney (OTCPK:JCPNQ), the storied retailer, had been founded in 1902 and paid dividends from 1987 until 2000. In the wake of the dot com crash, the company cut its dividend almost in half and then in half again the same year. It later increased, even during the last financial crisis, but in the end the crisis got the dividend and it was cancelled in 2012. The dividend was never restored. Finally, this year’s crisis got the retailer.
Dividend moves come in all shapes and sizes during a crisis and it can be helpful to spot the differences. Feel free to add your own field observations in the comments section below.
Disclosure: I am/we are long RDS.A, SAGKF, XOM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.