Even as companies around the world cut dividends, managers at Newton remain positive about the benefits of income investing. Here’s why.
Dividends are dwindling. At the urging of the Bank of England1, UK banks have suspended shareholder distributions. In the US, for recipients of the US$2 trillion CARE2 package, dividend issuance (and buybacks) is restricted for at least a year3. In Germany and France, companies receiving state aid have been told to halt dividends4. Meanwhile, troubled global groups – travel companies, for instance – are cutting or cancelling payments in an effort to stay afloat amid a global shut down. Some forecasts are predicting S&P 500 dividends will fall by 38% in the next nine months.5
Yet the team behind Newton global income, headed by Ilga Haubelt, say equity income investing is nothing if not resilient. The global income team note equity income investing is one of the key bedrocks of pension schemes and is likely to remain so in a world of very low interest rates. Personal pensions, company pensions and individual savings schemes will be needed more than ever, and dividends from equities are likely to play a major role since sovereign fixed-income may prove insufficient in providing an income.
“It’s important to maintain perspective at times of panic and short-term obsession,” says the investment team. “It’s also worthwhile reminding ourselves what dividend income does for an investor: it provides the power of compounding (if your dividends don’t disappear); it provides liquidity to continue investing at the lows; it helps one to mitigate against sequencing risk (i.e. when withdrawals are still required) and there is risk of being a forced seller at the wrong time.”
The Newton team believes the focus at this time should be on those businesses able to retain a dividend (or return very quickly to one if postponing a quarter’s payment). In the team’s words: “We believe this backdrop should be seen as an (albeit enforced) economic cycle. As with all cycles, the weak will struggle to survive. However, this ‘cycle’ has been self-imposed, and we believe it will be quite short term in nature (quarters not years).
“As such, for many companies, even if having to postpone dividends, recovery can be rapid. Consumers are being targeted by governments for help in paying wages for example, in order to hasten the return to previous demand levels. Although unlikely to immediately return to comparative levels, we would anticipate a strong bounce which should allow the stronger stocks to be able to resume dividend pay-outs quickly.”
UK dividends
As UK banks make headlines over their agreement to suspend their dividends, many investors are asking what this could mean for UK equity income funds. According to Newton’s Emma Mogford, there are plenty of sectors in the UK likely to be able to maintain shareholder distributions through this market and economic period of uncertainty, albeit selectively.
So far, she says, the biggest cuts have come from consumer discretionary (particularly travel and leisure and retail), financials and industrials and she expects more are likely to occur. However, traditional defensive sectors such as healthcare, utilities and consumer staples companies continue to see relatively stable earnings and dividends.
Nonetheless, she argues against investors seeking out companies simply because they continue to issue a dividend, nor selling those just because they have cut or suspend theirs. The investment case is still about companies with the best long-term capital return prospects, “even though, right now, it is easier to forecast a company’s ‘ability’ to pay than their ‘willingness’ to do so,” she adds.
She contends there are three key reasons to buy equity income – reasons which remain as relevant as ever. “First: equity income provides much better inflation protection than traditional government and corporate bonds. As we enter a new era of greater government spending, protecting the purchasing power of savings is paramount. Second: over the past 20 years to the end of 2019, global equities have delivered a 7.6% nominal return per annum which is attractive relative to other asset classes. Third: income funds have had lower volatility of returns in the past. We continue to believe this is the case for true income funds focused on sustainable dividend payers.”
Asian companies
While the US and parts of Europe may be curtailing dividends, not all regions are – especially in parts of the world where pay-out ratios are historically low, such as Asia. Although Asian financial regulators have been less prescriptive than those in Europe with regard to dividends, Newton Asian income manager Zoe Kan believes companies would be prudent to retain capital during times of duress to bolster long-term growth.
According to Kan, while Asian sectors such as aviation, leisure and tourism have been impacted by Covid-19, they are also defensive and cash-generative. “Therefore, while they are among the first to cut dividends, their recovery, once lockdown measures are relaxed as we are starting to see in China for example, should be fairly swift, allowing for a resumption of dividend payments when business conditions return to normal,” she explains.
Kan acknowledges dividend cuts across her markets are inevitable given the current backdrop but says there are reasons to be positive on the outlook for Asian income. Asian companies entered the coronavirus outbreak having underperformed world equities in preceding periods and, as such, valuations were not excessive in comparison to some developed market counterparts, she notes. “Fundamentally, Asian companies are also more financially robust, having not taken on too much leverage ahead of the current crisis,” she adds.
The value of investments can fall. Investors may not get back the amount invested. Income from investments may vary and is not guaranteed.
Important information
For Professional Clients only. Any views and opinions are those of the investment managers, unless otherwise noted. This is not investment research or a research recommendation for regulatory purposes.
For further information visit the BNY Mellon Investment Management website. www.bnymellonim.com. MAR000931
1FT.com. 1 April, 2020. British lenders suspend dividends after BoE pressure
2Coronavirus Aid, Relief, and Economic Security (CARES) Act
3National Law Review. 31 March, 2020. Effect of Dividend Prohibition on CARES Act Loans for Mid-Size and Large Pass-Through Entities
4Euractiv.com. 30 March, 2020. France puts dividends payments into confinement amid covid-19 crisis
5Investopedia. 2 April, 2020. Dividends Slashed as Companies Conserve Cash.
