The current recession is unusual because it is happening in almost all parts of the world at the same time, and because it’s been so sudden.
Normally, companies would flex their dividend cover target and dividends would reduce much less than profits. So far, 2020 is proving to be different. Analysts expect average earnings per share to fall by a fifth this year as companies struggle with lockdowns, disruption to supply chains and the sharp collapse in confidence.
There are reasons we can believe dividend income will be attractive in this low interest rate environment in the long term, but only if the dividends are viewed as sustainable. For example, Asia and emerging markets have good dividend cover and are expected to take a less severe knock in the current conditions. There is also a growing dividend culture in these regions.
Another reason the post-Covid yields might be more sustainable is because the cover has been rebased and is healthier than after the last crisis. Janus Henderson's Global Dividend index showed dividends are set to decline by between 15% and 34% this year. If dividends fall by only 15%, then dividend cover globally will only decline from 2.1x in 2019 to 1.9x in 2020. This compares very favourably to 1.4x in 2008.
In a normal year, we see 5%-10% of companies cutting dividends, but more than a fifth had already done so by May. Many companies taking a form of state support are unable (either by instruction or moral suasion) to pay dividends, while many more are simply cutting payouts to protect their balance sheets.
Naturally nobody wants to see their dividends get cut, but if it's in the interests of protecting a company and ensuring it can emerge from the crisis in good shape, then it is the right thing to do. A temporary halt in dividends does not change the fundamental value of a company - that is driven more by the ability of the company to flourish and grow over the longer term.
• In the long term, dividend income will be attractive in this low interest rate environment but only if the dividends are viewed as sustainable
• If dividends fall by only 15% then dividend cover will decline to 1.9x in 2020, compared to 1.4x in 2008
• No amount of financial support from governments and central banks can replace the financial impact of months of disrupted trading
• It is too early to know what the final outcome for both profits and dividends will be
Ben Lofthouse, fund manager of Henderson International Income Trust