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The collapse of dividends in 2020 has been one of the most intriguing, and notable, investment market consequences of Covid-19.
From listed companies to investment trusts, the dividend landscape is changing in ways not seen since the 2008 financial crisis. Unlike in 2008, however, the restoration of dividends to any kind of ‘old normal’ does not appear simply to be predicated on economic recovery: an array of political and social factors have been brought into play.
As autumn progresses, we are certainly not where we expected to be: at the start of 2020, IHS Markit had forecast a 10% growth in dividend payments over the year. In September 2020, the FT reported that the total cut to dividend payouts in the UK could, in fact, reach 50%. Globally, dividend payments in Q2 2020 were at their lowest level since 2009.
Key factors driving change to dividends
Underpinning this is the fundamental of financial resilience, and the need for companies to protect balance sheets; issuing dividends has fallen down the list of priorities for listed firms as they find attention focused increasingly on stability and even survival. There has also been an added political dimension.
In March, the Bank of England ordered banks and insurers to suspend dividends and buy-backs.
The Investment Association has noted that investment managers, who hold a third of the FTSE, have an important role to play in supporting companies through these tumultuous times. That is why in April the IA wrote to every company in the FTSE 350 outlining ways in which the industry would help and offering ‘honest’ advice on its members’ views on dividend payments.
There has even been an operational hindrance to paying dividends: the impact of Covid-19 on AGMs has led to some dividend suspensions because the meetings and the votes themselves could not take place. And so there have been economic, financial, political and operational impediments – creating quite an unprecedented mix.
Implications for investment trusts
At times like these, investment trusts have historically had an advantage as they have been able to draw upon revenue reserves, and indeed some trusts have already announced on dividends, such as City of London in July. However, with everything else being disrupted by the pandemic, the impact on so-called ‘dividend heroes’ – trusts that have issued growing dividends year on year for more than two decades in a row – is open to speculation. Increasingly, trusts are indeed drawing on their reserves, suggesting that hero status will be more hard won this year.
There has been some speculation that Covid-19 is moving the market away from shareholder primacy altogether, towards a model of stakeholder capitalism where dividends are much less of a priority
Whether the dividend is issued by a listed firm or an investment trust, the disruption to the dividend landscape is not, of course, happening in a bubble: there will be an impact on end investors as a result of this transformation – for example, among pensioners and those who depend on dividends as a source of income.
All of which raises the question of what might happen next.
Where do we go from here?
This depends on an array of factors, not least of which is how the pandemic pans out in the coming months. The shape of the economic recovery will play a key role: with a V-shaped recovery, we might expect a return to normal, whereas other potential models, such as the W- or L-shapes that have been mooted, would encourage far more conservative approaches to dividends. Different sectors of the economy, such as leisure and hospitality, are, of course, more exposed and can be expected to apply the brakes on dividends for longer, meaning that a return to dividends will not be even across sectors.
Aside from financial and economic factors, we also need to consider that political dimension: at least in the short term, many companies may feel under increased expectation to focus on protecting balance sheets and protecting employees, as opposed to rewarding shareholders.
At an even higher and more esoteric level, there has also been some speculation that Covid-19 is moving the market away from shareholder primacy altogether, towards a model of stakeholder capitalism where dividends are much less of a priority. In this regard, the pandemic may be accelerating a trend that had been picking up anyway; for example, in 2019 the Business Roundtable – a corporate lobbying group in the US – published a letter signed by 181 CEOs committing to stakeholder primacy.
A pivotal moment
If Covid-19 is indeed accelerating an ideological shift like this in the capital markets, then there will be significant strategic and operational implications for the asset management industry.
The market is therefore potentially facing an historic upheaval to one of its most fundamental concepts, with implications for companies, funds, and investors, and the picture is complicated not just by economic factors but by political and societal and even ideological factors.
The IA has made clear the view of its members that shareholders will expect companies to restart dividends as soon as it is prudent to do so. It remains to be seen whether this will be the case.
Covid-19 has proved to be a disruptor to so much of the economy in 2020; it may prove to be pivotal for dividends, too.