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The pace of the Covid-19 2020 downturn has put company revenues, payroll, tax, debt servicing and fixed cost obligations under the spotlight.
The pressing issue is liquidity, how much cash does the company have access to? How much cash is needed to get over Covid-19?
Going into the Covid-19 problem, UK corporate cashflows were generally being optimized to maximise shareholder payments, make acquisitions, fund capital expenditure. But now companies must hunker down and delay capital decisions.
UK corporate cashflows are under severe pressure and facing an open-ended period that will see extra costs from business disruption, far lower revenues, declining profits and an intensifying competitive environment. Companies are likely to cut discretionary capital spending (including dividends) first, delay M&A plans and delay upfront corporate restructuring decisions.
Dividend payouts are an issue, but from a corporate viewpoint a relatively low priority one. Some stocks are indicating ‘risky’ 10%-17% dividend yields, when referenced to the old world of 2019. We expect 2020 will see significant payout changes / dividend deferrals/ scrip alternative offers as companies conserve cash.
Shareholders are not going to be pressing boardrooms in this strained environment, they have the same priorities, that the company gets through this tough, low revenue period with minimum debt accumulation and without too much permanent damage. No company wants pay shareholders out of scarce funds before having to draw on government financing shortly thereafter.
The sell-off has increased UK equity market ‘yields’, investors require higher yields and are placing a higher discount rate on payment expectations.
|Company||FY19 Annual Dividend||
20 March 2020
|DY (%) 31 Dec 2019||Δ Change|
|Legal & General||16.21p||10.6%||5.2%||5.4%|
|Royal Dutch Shell||US$1.88||15.1%||7.1%||8.0%|
Source; CSS Investments Ltd
Dividend yields have surged during the sell off (from end 2019) – the selection of UK blue chips (above) have underperformed UK indices, which has moved from a 4.5% dividend yield to c. 7.25%.
Dividend growth over 2020 is a moot point at this stage. When viewed with the cash cost of dividends v free cash flow a clear picture emerges.
|Company||Dividend Cost||Free Cash Flow||COMMENT/ VERDICT|
|Barclays||£1.55bn||Stable||CEO Jes Staley, subject of FCA probe promised 9p, hence high risk / CUT|
|BATS||£4.8bn||Stable||BATS wants to keep the payout despite structural problems / HOLD|
|BHP Group||US$2.8bn||Negative||BHP will post lower oil revenues but iron ore, copper is stable/ HOLD|
|BP||US$8.5bn||Negative||Cashflows under intense pressure, given Brent <$30/ bbl / CUT|
|Carnival Corp||US$1.39bn||Negative||Revenues under intense pressure over Q2, Q3 / CUT|
|Easyjet||£174m||Negative||Revenues under pressure, EZJ paid 2019 dividend, but in 2020? / CUT|
|Glencore||US$2.66bn||Negative||Expect GLEN to maintain dividend largely funded by debt/ HOLD|
|HSBC||US$10.36bn||Stable||Low US rates will hurt NIM, but payroll savings will fund payout/ HOLD|
|IAG||€1.29bn||Negative||Revenues under intense pressure, expect dividend cut/ CUT|
|Legal & General||£1.05bn||Negative||Business will be impacted by bulk annuity demand, but dividend HOLD|
|Lloyds Banking||£2.37bn||Negative||Board likely to hold dividend at current levels/ HOLD|
|Royal Dutch Shell||US$14.7bn||Negative||Cashflows under intense pressure, share scrip alternative is likely/ HOLD|
|RBS||£3.03bn||Negative||NIM under severe pressure/ CUT|
|Vodafone||£1.9bn||Stable||Board cut dividend prior to crisis hence expect dividend / HOLD|
Source; CSS Investments Ltd
There is a “the more the merrier” aspect to this, so far Berkeley Group has cancelled its 400p special payout to conserve cash, Crest Nicholson cancelled its dividend the day it went XD (the first time I can recall this occurring). National Express said its dividend was under review ahead of ex dividend on 23rd April 2020.
Clearly the longer this environment persists, the higher the risk to payouts. Investors may be a bit in denial about the potential for dividend cuts over 2020. There is ample scope for surprises on dividends as cashflows are repositioned or as boards make decisions on drawing down government funding.