Does it come as a surprise to you that more and more companies are reducing or renouncing their dividends?
No, not at all. Companies with cyclical business models are partly faced with significant decreases in profit. Reducing dividends is, therefore, a logical consequence. But there is also good news: there will be companies in the corona crisis which will not only pay dividends but even increase them. It does, however, make sense for companies to retain part of their profits in this currently difficult phase – for example, in order to safeguard their existence or operations.
Where can investors forget all about dividends this year?
Let us take Eurozone banks as an example: due to regulatory constraints, the probability is rather high that they will not pay out dividends this year – irrespective of the fact that, based on their earnings situation or balance-sheet quality, many a bank might well be in a position to distribute part of its profits. Moreover, many companies falling back on government aid during the corona crisis will not pay any dividends either.
To what extent are cyclical sectors affected?
These companies will, without any doubt, have to cut back more often than companies with returns less dependent on the business cycle. A lot of car makers, auto suppliers, industrial companies but also companies in tourism, aviation and fashion have already cut or completely cancelled their dividend payments.
How would you explain this strong discrepancy between the United States and Europe?
The first reason is the absolute amount of dividend payments. The second one is the sector composition of the various indices. The absolute dividend yield on the U.S. stock market is roughly 2 %. In Europe, this figure is almost twice as high. In the United States, share buybacks are much more prevalent. Even if these programmes were also partly suspended, the stock market tends to respond less markedly than to dividend cuts. And European stock market indices tend to include more cyclical companies – such as banks, industrials, cyclical consumption and energy. The probability of a dividend cut during a recession is, therefore, much higher in Europe than in the United States.
Let us look at your dividend portfolios: could you give the all-clear or should investors get prepared for high default rates, similar to those on the overall stock market?
To date, only a handful of companies had to cut their dividends. As things stand today, we even expect roughly 70 per cent of the companies to increase their dividends in the current business year. The major part of our portfolio is invested in shares belonging to rather defensive sectors. Roughly two thirds are from the health, regulated utilities, telecommunications, non-cyclical consumption and insurance sectors. Their profits are expected to slump much less than cyclical companies.
So what can investors expect with a view to distributions at the end of November 2020 or at the beginning of March 2021?
In normal years, forecasts are comparably easy right at the beginning of the year. This year it is much harder. But despite partly harsh profit slumps and dividend cuts, we want to keep our distributions on the level of the previous year.