Investors could see dividend payments fall by a third or more over the short term, as the fallout from COVID-19 has a bigger impact on dividends than the global financial crisis, an investment manager has warned.
AMP Capital has made the forecast, saying while shareholders will suffer, the cuts will help companies save money and ultimately help their survival over the long run as businesses recover.
Revenues in the Australian economy are drying up as the tightened restrictions on going outside amid the pandemic keep consumers and workers at home.
AMP Capital Australian equities portfolio manager Dermot Ryan highlighted while the outlook is currently bleak, it is for the short term.
“Remember this crisis will pass. In AMP Capital’s view, it’s prudent to value companies on a mid-cycle three-year basis, so you can calmly look through the short-term pause to find companies that can grow their dividends in normal times,” Mr Ryan said.
“We believe this favours long-term investors. Further, there are pockets of real value on offer in the market now. Investors that can may consider adding selectively.”
Despite a weaker outlook, dividends announced in February have been paid, there have been high levels of franking and, up until now, it had been a good financial year for payouts, AMP Capital reported.
Banks and REITs are the main sectors left to pay large dividends before the end of the financial year, but both sectors are expected to cut their payouts sharply in the second quarter due to the knock-on effect of rent and mortgage abatements. The sectors will need capital to service their own debts as they carry high debt loads.
“The virus outbreak and lockdown response have also dramatically slowed economic activity in sectors such as travel and aviation. The consumer impact has spread to retail, media and gaming, which are unlikely to pay any more dividends this year,” Mr Ryan said.
“Keeping precious working capital is key as companies move to preserve cash by temporarily standing down workers, negotiating rental abatements with landlords and reducing outgoings,” Mr Ryan said.
“It is only reasonable that dividends are crimped to preserve cash, too, particularly as debt costs for non-investment grade companies spike.”
Companies that have strong balance sheets may still have the ability to pay dividends, but AMP Capital has recommended management to make “prudent decisions” in allocating that cash and to prioritise the long-term operations of their company.
Buybacks have not been spared, with both Qantas and Viva Energy announcing buybacks, only to later cancel them.
However, while dividends lag with activity, capital raisings may be a “happy hunting ground for new equity investments”. Mr Ryan has said investors should look for companies with fixed balance sheets and set up for an upswing in profits and dividends ahead.
“Remember, this is transitory and the crisis will pass and profits and dividends will bounce back,” Mr Ryan said.
“Shareholders could consider valuing companies on a mid-cycle three-year basis so they can calmly look through the short-term pause to find companies that can grow their dividends in normal times.”
The crisis will favour long-term investors, he said, particularly if they’re able to select equities with “pockets of real value in the market”.
AMP Capital has favoured investment in essential services, supermarkets, infrastructure, packaging, hospitals and aged care.
It also expects telecommunications and service providers to do well as households increase their mobile and broadband packages and carriers start their 5G capex spending.
“With the Australian dollar at a multi-year low and uncertainty globally, we think our energy, mining and even wine industries will benefit from this new currency tailwind,” Mr Ryan said.
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