Shareholders have joined the unemployed in having their income slashed by the COVID-19 pandemic.
While the profit reporting season still has a week to run, the deferral, cancellation and cuts to dividends has been one of the major features of companies to report so far.
Traditionally, the big four banks have paid by far the biggest dividends but that source of income for retirees and other shareholders has been slashed as the banks hang on to as much capital as they can to weather the coming frozen debt storm.
So far this month, the vast majority of companies are announcing they’re cutting their dividends by half, or not paying anything at all.
Many companies slashing payments
It is not just banks that have been slashing dividends – companies including building products maker James Hardie (ASX: JHX), financial services company Challenger (ASX: CGF), Qantas (ASX: QAN), Transurban Group (ASX: TCL) and Sydney Airport (ASX: SYD) have either ditched dividends entirely or slashed them – for now.
The Commonwealth Bank (ASX: CBA) might be the strongest of the big four but it still reduced full-year dividends to $2.98 per share, compared to a full-year dividend of $4.31 in 2019.
Rio Tinto (ASX: RIO) decreased its dividends to $2.16 per share, or $5.65 for the year compared to nearly $9 per share last year and BHP (ASX: BHP) decreased its dividends from $0.99 per share in March to $0.78.
Billions of dollars won’t be spent now
These dividend cuts represent billions of dollars that would normally flow back into the economy as pre-Christmas spending that just won’t happen now – along with the pull back in general spending that always accompanies a recession and a period of high unemployment.
That is sure to stifle the chances of a swift economic recovery – not to mention greatly reduce the standard of living for many retirees and others who rely on dividend income to pay their bills.
According to CommSec numbers, the percentage of reporting companies that have elected to pay a dividend is just 68% compared to the average over the past 20 reporting seasons of 86%.
Dividends down 32%
That is a significant fall in the number of companies declaring dividends but there is also a fall in the size of those dividends that were paid.
Overall, the CommSec numbers show that dividends are down 32% on a year ago, which will feed through to a significant cut in consumer spending and will also feed into returns on superannuation.
The fall in dividends is not just an Australian issue – it is happening all around the world.
According to fund manager Janus Henderson, the COVID-19 pandemic will cause the world’s biggest companies to slash dividend payouts by 17%-23% this year, which equates to around US$400 billion.
Global dividends down US$400 billion
The research found global dividend payments plunged US$108 billion to US$382 billion in the second quarter of the year – a 22% year-on-year drop which will be the worst since at least 2009.
All regions saw lower payouts except for Canada where payments proved to be resilient.
Worldwide, 27% of firms cut their dividends, while worst affected Europe saw more than half do so and two thirds of those cancel them outright.
“2020 will see the worst outcome for global dividends since the global financial crisis,” Janus Henderson said.
“We now expect headline global dividends to fall 17% in a best-case scenario, paying $1.18 trillion.
Our worst-case scenario could see payouts drop 23% to $1.10 trillion.”
Not all sectors hit as hard
It wasn’t all bad news though with the Janus Henderson finding that some sectors were better than others.
As expected, banks and other financial companies were hit hard, with the European Central Bank orders for lower dividends causing a 45% reduction in Europe’s second quarter dividends to US$77 billion.
Miners and oil companies were also hit hard by the slump in oil and some commodity prices while consumer discretionary companies reduced payments after their profits were hit hard by government lockdowns.
Tech, telcos and healthcare dividend heroes
At the other end of the spectrum, tech, telecom and healthcare firms’ dividends were relatively unaffected, with dividends up 1.8% and 0.1% respectively on an underlying basis.
The resilience of technology dividends saw Microsoft and Apple power their way into the top ten of world dividend payers for the first time this year.
“Dividend trends are reflecting the trends in society and the stock market at the moment,” said Janus Henderson’s head of global equity income, Ben Lofthouse.
“Probably we are going to see increases from parts of the tech sector,” he added. “There are a lot of very strong balance sheets in that area.”
He said the future strength of global dividends would depend on a number of factors, including the path of the COVID-19 virus, what US firms do later this year and whether Europe’s banks get the green light early next year to restart their payments.
“The big question for the US is what will happen in the fourth quarter. If many companies make significant cuts to their dividends, payouts will be fixed at a lower level until towards the end of 2021,” said Mr Lofthouse.