Text size
Photograph by Sharon Mccutcheon
Just how safe stock dividends are is subject to divergent views among equity research analysts.
Consider three notes issued this past week.
An April 7 Bernstein report, for example, is titled “Portfolio Strategy: Will There Be Any Dividends Left?” To be fair, the authors aren’t as gloomy as the headline portends.
In contrast, a BofA Global Research note the same day asserted that dividend “risks seem contained for the S&P 500,” though they do expect more cuts among those companies—but just not a wave.
Elsewhere, Chris Senyek, chief investment strategist at Wolfe Research, is also expecting more dividend cuts to be announced when companies announce their first-quarter earnings results soon.
Dividend suspensions, he adds in an April 8 note, are “a prelude to a full cut/omission and we don’t expect such companies to return to paying dividends anytime soon.”
Senyek, who studied dividend cuts that occurred from 1995 to 2019, did find one sliver of encouraging news for income investors. Although stocks over that period underperformed prior to an announced dividend cut, they later outperformed. That began six months after an announced cut, on average—though those returns varied considerably.
“In general, cyclical companies cutting dividends subsequently outperformed over other companies,” Senyek observed, adding that industrials, energy and materials also fared well.
Of course, with a potentially steep recession looming due to the coronavirus pandemic, it’s hard to say whether that will hold this time.
Meanwhile, the BofA Global Research report expects “elevated dividend risk” for another 30 companies in the S&P 500. That’s on top of the roughly 20 companies in that index that had already cut or suspended their payouts since March 1.
Still, Savita Subramanian, who heads equity and quant strategies at BofA Global Research, observes in the note that dividend “risks seem contained for the S&P 500.”
She and her colleagues predict that more dividend cuts will occur in the “obvious, most stressed industries: energy and consumer.”
Subramanian said that the futures market, which is pricing in a 30% decline in S&P 500 dividends in 2020, is too aggressive in its forecast. Based on more conservative assumptions, which include limited dividend growth and big cuts in sectors such as energy, real-estate investment trusts and consumer companies, BofA expects a drop closer to 10%.
“Note that futures grossly overestimated dividend cuts in 2008/2009 as well,” she adds.
The Bernstein analysts cite two reasons for why they expect more dividend cuts. One is the likelihood that companies receiving government aid will have to forgo their dividends, at least in certain countries.
Under the recently passed CARES Act in the U.S., for example, “companies that borrow money from the federal government may not repurchase stock, pay a dividend, or make any other capital distributions until 12 months after the loan is repaid in full,” according to Goldman Sachs.
The other reason for more cuts, Bernstein observes, “is the risk that paying dividends at least in the short to medium term becomes actually socially unacceptable.”
That hasn’t happened yet in the U.S., where there’s been more focus on stopping buybacks.
Among the U.S. companies that Bernstein maintains have sustainable yields are
International Business Machines
(IBM), which yields 5.2%;
Johnson & Johnson
(JNJ), 2.7%
Hershey
(HSY), 2.1%;
J.M. Smucker
(SJM), 3.1%, and
Medtronic
(MDT), 2.1%
Write to Lawrence C. Strauss at [email protected]
