The stock markets in 2020 have swung between the worst (-22.6% in Europe in Q1) and the best (+13.5% in Q2). The rest of the year remains uncertain at the very least. However, one thing is now certain: 2020 will remain one of the worst years in terms of the trend in dividend payments. France is a prime example of this with no less than 2/3 of the CAC 40 companies reducing or eliminating their annual dividend. If dividend cuts are normal in recession periods (as was the case in the major financial crisis in 2008/2009), a particular characteristic of this crisis is the unprecedented number of dividend cuts at the “dividend aristocrats”.
This pompous phrase covers all those companies that manage, year and year and regardless of the economic context, to maintain or lift their dividend per share. In this regard, LVMH has just ended over 25 years of uninterrupted growth in its dividend per share. The same thing has been seen at Royal Dutch Shell, where the series of dividend increases ran back to World War II (even if the introduction of a dividend in shares a few years ago was already a serious exception to the rule). While dividend cuts are commonly seen among high yield stocks, which generally have cyclical businesses and/or strained balance sheets, such moves are unusual for the “dividend aristocrats”, which generally operate in less cyclical sectors and benefit from stronger than average balance sheets.
The final result of this year cannot be established yet, as certain groups have simply “postponed” their decisions concerning the payment of their dividend, raising hopes for a payment at the very end of the year. Nevertheless, as far as we can see at present, the conclusion is clear: 40% of the companies belonging to this small family of “dividend aristocrats” have reduced or suspended their dividend this year. In comparison, this percentage was only 17%* during the 2008/2009 financial crisis.
The explanation of this haemorrhage can be found in the particular nature of the current crisis linked to the COVID-19 pandemic. The subject this time is effectively less the cyclical or defensive nature of the business in which the company operates. Instead, it is the company’s ability to remain “open” during the crisis. A new dichotomy has consequently appeared, including in the “defensive” sectors such as healthcare and food, between companies that produce and have remained “open” and companies that distribute through points of sales and have been closed down by government orders. This dichotomy has led to the ability of Novartis, Roche and Sanofi to maintain a rising dividend at the same time Essilor-Luxottica and its German competitor Fielmann have cancelled their dividends. The same cause and effect can be seen in the food sector, where the Nestlé and Danone have been able to continue to lift their dividend at the same time the contract catering operator Compass and the sandwich shop operator Greggs have suspended their dividend.
Far from being simply anecdotic, these eliminations or reductions in dividends can have a lasting impact on the stock market performance and valuation of these companies. Numerous academic studies effectively tend to prove that investors award a valuation premium to companies that lift their dividends year after year. As such, a rupture in the shareholder remuneration policy clear risks to have an inverse effect on these new “commoners”.
*based on figures coming from our proprietary databases.
by Value team, July 2020.
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