Europe Dividends Under Pressure, Putting $178 Billion at Risk

(Bloomberg) -- The coronavirus pandemic may cause dividend payments by European companies to halve in 2020, threatening a major source of income for investors in the region’s equities, according to Citigroup Inc.

With an increasing number of companies lowering, suspending or reviewing their payouts, Citigroup strategists led by Robert Buckland say more could be on the way as a 1.6% contraction in global growth would slash European earnings by 50%.

For pension funds heavily invested in income strategies, the blow will be especially severe. In 2019, continental European firms paid about $251 billion in dividends, while U.K. corporates distributed $106 billion, according to Janus Henderson. Should Citi’s prediction prove accurate, about half of that total, or $178 billion, would be wiped out.

“Dividend per share doesn’t usually fall as much as EPS, but high payout ratios, along with corporate prioritization of balance sheets and employees, may mean European dividends also halve,” Buckland wrote, noting that the payments to shareholders fell by a third during the 2008 financial crisis.

Across the region, companies from luxury-goods makers to banks are under pressure from lawmakers to cut back on payouts. On Monday, the European Central Bank recommended that lenders suspend their dividends and is now looking to force them to do so if they don’t bolster capital during the coronavirus crisis. Meanwhile, Tod’s SpA canceled its payout, with Citigroup analysts predicting more such moves across French and Italian peers.

Morgan Stanley analysts estimate that mechanically, if banks dividends were canceled for a full year, this would imply a 8% hit to index level distributions for the MSCI Europe. Should other European bank regulators follow suit, the impact would amount to 18%.

The impact of declining dividends will be felt particularly acutely by investors in Europe, where yields are higher than in the U.S. The Stoxx Europe 600 trailing dividend yield stands at 4.4% compared with 2.3% for the S&P 500, as buybacks have been the main way to return money to shareholders in the U.S.

Large payouts and an over-exposure to high-yielding energy and financials makes the U.K. particularly vulnerable to dividend cuts, according to Citi’s Buckland.

Since the global financial crisis, most of the returns generated by European equities have been linked to dividends. Before the drawdown triggered by the coronavirus outbreak, the MSCI Europe index was up barely 10% since 2000, while its total-return equivalent had risen more than 80%.

©2020 Bloomberg L.P.