Even Defensive Stocks May Crumble in Virus Fallout

(Bloomberg) -- Investors looking to hide out in defensive stocks may need another plan as companies across Asia squeezed by disruptions from the virus outbreak eye their dividends.

Supply-chain interruptions, evaporating sales and other rippling effects from the spread of the novel coronavirus in China and across the region may spur companies to cut their dividend payouts in a bid to preserve their working capital, said Sean Darby, global equity strategist with Jefferies Financial Group Inc.

“Companies face a huge working-capital squeeze during national disasters and unforeseeable virus outbreaks,” Darby said in a Feb. 10 note. “Many CEOs will look to cut their dividends as a way of preserving cash. The good news is that the number of stocks on the critical list is small, however the utility companies don’t appear to offer the same defensiveness as investors might think.”

Excluding financials, Darby highlights about two dozen especially vulnerable Hong Kong- and China-listed companies in sectors including utilities, telecommunications and real estate that have a combination of a dividend-coverage ratio of less than 2 times and a net debt-to-equity ratio greater than 50%:

Darby also remains cautious toward real estate investment trusts in Hong Kong as they have high payout ratios and are “very susceptible” to negative rental revisions. He notes anecdotal evidence suggesting drops in office, commercial and residential rents due to a combination of the political protests and virus.

“It is clearly not a great period for the local Hong Kong banks,” he said.

While slashing dividends to save cash may be a solution in the near term, the region’s prospects looking ahead will still depend in large part on disruptions to the Asia supply chain subsiding.

Global economic growth could be affected by as much as 30 basis points in the first quarter if China is able to resume production quickly after Monday, Chetan Ahya, chief economist with Morgan Stanley, said in a Feb. 9 note. However, in a scenario where the outbreak peaks in April, first-quarter growth could be constricted by up to 75 basis points, with the weakness bleeding into the first half, he said.

Stock-Market Summary

• MSCI Asia Pacific Index down 0.5%
• Japan’s Topix index down 0.6%; Nikkei 225 down 0.5%
• Hong Kong’s Hang Seng Index down 0.8%; Hang Seng China Enterprises down 0.8%; Shanghai Composite down 0.4%; CSI 300 down 0.4%
• Taiwan’s Taiex index down 0.4%
• South Korea’s Kospi index down 0.6%; Kospi 200 down 0.8%
• Australia’s S&P/ASX 200 down 0.2%; New Zealand’s S&P/NZX 50 down 0.5%
• India’s S&P BSE Sensex Index down 0.4%; NSE Nifty 50 down 0.4%
• Singapore’s Straits Times Index down 0.6%; Malaysia’s KLCI down 0.5%; Philippine Stock Exchange Index down 0.6%; Jakarta Composite down 0.7%; Vietnam’s VN Index down 0.8%
• S&P 500 e-mini futures little changed after index closed down 0.5% in last session

To contact the reporter on this story: Eric Lam in Hong Kong at elam87@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Lianting Tu, Cecile Vannucci

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