The U.S. Market Can Learn From Europe’s ‘Thoughtful’ Payout Cuts
European companies have been quick to slash or cancel their dividends in response to the coronavirus crisis, fueling calls from market participants that U.S. firms should take heed and preserve cash.
The pandemic’s damage to profit as well as regulators’ calls for corporations to preserve liquidity have so far pushed 107 companies in the benchmark Stoxx Europe 600 Index to cancel or delay their payouts. This compares with only 10 S&P 500 companies that have so far suspended their dividends, with a further 21 projected to trim their payouts in the second quarter.
“Europe has always been more thoughtful about dividend policy -- in the U.S. a lot of companies treat dividends as sacrosanct, something to never be cut,” said Edward Perkin, who oversees $45 billion as chief equity investment officer at Eaton Vance Management in Boston. “The U.S. may rethink that and try to have more flexibility in dividend policies going forward.”
Until this year, the European equity market had a reputation for some of the world’s highest dividends, nearly double those of the U.S. -- a feature that attracted investors hunting for yields.
But as the coronavirus continues to spread across the world and economies suffer from lockdown measures, shareholders are increasingly favoring companies with strong balance sheets and credit quality. The February fund manager survey by Bank of America Corp. showed that investor calls for companies to improve their financial positions overtook those for increasing capital spending for the first time since October, with just 15% in favor of firms returning cash to shareholders.
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“In this situation you need to preserve cash as much as you can, so this is a move protecting cash that makes absolute sense,” said Charles de Boissezon, deputy head of global asset allocation and equity strategy at Societe Generale SA. “The pressure that you see with dividends in Europe is the pressure you see on buybacks in the U.S. where these have gone too far, raising debt and burning cash just to conduct buybacks.”
In the U.S., shareholder returns are usually dominated by buybacks, which have exceeded dividends in every quarter since 2010. President Donald Trump said two weeks ago he disapproved when proceeds of his 2017 tax cut were spent on such returns. Some major U.S. firms are slashing or suspending buybacks, but maintaining their dividends, Intel Corp. being a case in point.
European banks, particularly in the U.K., France and Spain, are leading other industries in terms of payout cancellations following the European Central Bank’s recommendation that lenders delay dividends until at least October after offering them unprecedented support measures. While the Euro Stoxx Banks Index sank to a 1988 low this week, John Teahan, a portfolio manager at RWC Partners, is focusing on the longer-term benefits of such moves.
“We believe U.K. banks themselves have done a very good job in ensuring they were in a strong position to begin with, in stark contrast to their position facing the financial crisis a decade ago, while the halt to dividends, share buybacks and cash bonuses for senior management will reinforce this strong position,” he said.
Martin Todd, a portfolio manager at Federated Hermes, says he’s staying invested in European stocks that are affected by dividend cancellations or cuts, including banks, business services, leisure and industrials. He praised their response to the crisis and said that if the economy rebounds, these firms can always pay a special dividend later on.
“I’ve certainly been impressed by how quick European companies have been to cut or defer their dividends,” Todd said by phone. “We simply don’t know how long this downturn can last and how deep it can be. So it could be very prudent for companies to not pay their dividends.”
Firms in Europe should also benefit from not having lavished the kind of sums on buybacks that U.S. companies have, he said.
“In Europe we haven’t had anything like the U.S. buyback activity, you haven’t really seen companies issuing debt and buying back shares and levering up. Now, most companies are very glad they didn’t do that considering how important balance-sheet strength is.”
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