Not All Dividends Lost to Pandemic Will Return in the New Normal

(Bloomberg) -- The pandemic may leave a permanent mark on European dividends, the main vehicle by which equity investors have made money in the region’s stocks in this century.

Some payouts halted after the first surge of Covid-19 cases are starting to come back, but sectors including banking and energy face structural pressures. That could usher in long-term changes in Europe’s investment landscape, where shareholders tend to be rewarded with dividends rather than the buybacks popular in the U.S.

The benchmark Stoxx Europe 600 Index has almost doubled in the past 20 years on a total return basis, but has barely budged when stripped of payouts. The impact will be even greater on markets such as the U.K., heavily reliant on dividend-rich industries.

“For most companies, this is just another cycle, albeit one with an unprecedented disruption of physical activity,” said Sam Witherow, a portfolio manager at JPMorgan Asset Management. “However, for others, this crisis has accelerated structural pressures and hastened a painful reckoning. Good examples would be banks or big oil.”

Britain’s over-exposure to these sectors has become a liability for the home of equity income funds. Nearly a quarter of the FTSE 350 Index’s total dividends in 2019 came from oil and gas, double the proportion for the Stoxx 600, according to data compiled by Bloomberg. Banks accounted for 12% of U.K. payouts, compared with just 6% for the euro area.

U.K. dividends are set to fall by a bigger amount than in any other major European country this year, Bloomberg data show. A quick rebound is unlikely, as there has been “a permanent re-basement of oil stock income,” Witherow, manager of the JPMorgan Global Equity Income Fund, said in a phone interview. The country’s fallen dividend aristocrats aren’t blameless, he said, as they “have over-rewarded shareholders at the expense of future-proofing their businesses.”

“This crisis has really showcased the benefits of long-termism, both for corporates and the shareholders invested in them.”

-- Sam Witherow, JPMorgan Asset Management

“After dividend cuts or cancellations from Shell, HSBC and BP during the course of the year, British American Tobacco is now forecast to be the biggest dividend payer in the FTSE 100 in 2020,” AJ Bell Plc said in a report earlier this week. “Not all investors will welcome this, especially those who feel that tobacco does not pass their socially responsible investing (SRI) screen tests.”

There may be a silver lining to Britain’s slow dividend recovery, however: “Analysts seem to think that boardrooms will not look to splash the cash too quickly if the good times do start to roll, as earnings are forecast to grow faster than dividends in 2021,” the U.K. stock broker said.

Bridled Banks

Europe’s lenders may fare little better. The total amount of dividends for the sector is likely to take more than four years to recover, according to estimates compiled by Bloomberg.

Hit by the European Central Bank’s payout ban and similar advice from the Bank of England, a majority of investors in a JPMorgan survey expect cash dividend ratios to be lower for banks after the restriction lifts. That’s despite strong cash reserves, potential M&A in the sector and few capital concerns.

French banks, which had promised the fattest dividend payouts to their shareholders, have been leading critics of the central bank’s ban. Societe Generale SA Chairman Lorenzo Bini Smaghi on Wednesday warned that the policy risks making the industry “uninvestable.”

The Stoxx 600 Banks Index has tumbled 42% this year, about three times more than the broader benchmark, and SocGen is the third-worst performer in the industry, down about 64%.

Derivative traders don’t expect a return to pre-pandemic levels for euro-area lenders in the next four years either, judging by dividend futures with maturities out to 2024. In fact, they are more pessimistic than analysts, with contracts maturing in 2021 and 2022 trading at 35% and 42% discount to brokers’ forecasts, respectively.

The pandemic has also brought forth some new payout winners. The technology sector “has joined classic defensives in the dividend resilience spectrum, due to nature of this crisis” increasing work-from-home activity, according to JPMorgan’s Witherow. Software firms have also benefited from moving toward subscription-based business models from one-time licenses, while hardware companies have shed assets from their balance sheets.

While a large number of companies cut or halted their dividends earlier this year, there have been some signs of normalization of late. Construction-materials supplier Ferguson Plc on Tuesday proposed reinstating dividends. In Sweden, several firms including Husqvarna AB and Holmen AB have in recent weeks announced plans to resume payouts.

©2020 Bloomberg L.P.