Dividends under attack

It has been an extraordinary few weeks for the investing public as I documented in my last article covering the performance across the international and local equity markets during the first quarter of the year. Apart from the severe dent to investor sentiment from plunging equity prices and the downward pressure on corporate bond and Malta Government Stock prices, another blow for local investors was the decision by a number of companies to cancel, suspend or delay their upcoming dividends.

Most companies around the world have specifically documented their efforts to conserve cash during the current crisis. Cash is required by all companies to pay salaries and suppliers, service any debt and fund any expansion efforts. Under normal circumstances, cash is either generated internally or externally. Internally generated cash is represented by the portion of profit which ends up as cash in the bank while externally generated cash represents funds from third-party sources namely via bank borrowing or through the capital markets in bonds.

As revenue generation across many industries worldwide has collapsed since most economies entered into a semi or total lockdown, internal sources of cash for a large number of companies has dried up. As a result, hoarding cash has become a top priority for many companies while others have also needed to become more reliant on bank borrowing to meet expenses. Since companies cannot rely on support from banks for an indefinite period, dividends to shareholders have come under attack.

In Malta, the airport operator was one of the first companies to announce a reconsideration of the dividend despite a debt free balance sheet and a high level of cash. On 26 February, MIA had published its 2019 annual financial statements and the company’s directors recommended an increase of 11.1% in the final dividend distribution to €0.10 net per share. Barely three weeks later, MIA announced that an Extraordinary Board Meeting is being held on 22 April to “re-consider the then current state of affairs and any measures which the company may need to implement, and also discuss whether the situation merits a re-consideration of the proposed net dividend of €0.10 per share”. Ever since its Initial Public Offering in 2002, MIA paid semi-annual dividends to its shareholders without fail.

GO plc announced a recommended full-year dividend of €0.14 per share on 12 March and the company further declared on 2 April that given the current extraordinary circumstances, it will be re-evaluating the previous recommendation.

In the banking sector, the situation was somewhat different since on 27 March, the European Central Bank issued a strong recommendation to all European banks to suspend dividend distributions and share buybacks in order “to boost banks’ capacity to absorb losses and support lending to households, small businesses and corporates during the coronavirus (‘COVID-19’) pandemic”.

On 19 March, Bank of Valletta plc published its annual financial statements and for the first time since the publication of the 2018 interim financial results, it recommended the payment of a net dividend of €0.017 per share. However, following the recommendation by the European Central Bank, BOV announced on 1 April that it decided to keep the initial proposal for distribution of the dividend but make the actual payment conditional on the reassessment of the situation once the uncertainties caused by ‘COVID-19’ disappear, the earliest of which, in line with the ECB’s recommendation, would be 1 October 2020.

HSBC Bank Malta plc immediately followed with an announcement on 2 April stating that it is “obliged to delay the payment of the final net dividend of €0.014 per share for the 2019 financial year and also potential future dividends”. HSBC Malta also explained that it will re-examine the situation and will update the market accordingly once this is appropriate to do so, but not before Q4 2020.

Lombard Bank Malta plc stated that it decided to retain its original recommendation for a net dividend of €0.0455 per share subject that payment will not occur earlier than 1 October 2020, and also that the recommended dividend distribution be reassessed once the situation due to the ‘COVID-19’ pandemic is no longer uncertain.

Meanwhile, other Maltese companies proceeded with their dividend recommendations and will actually pay out the dividend notwithstanding the delay in shareholder approval via their respective Annual General Meetings. In fact, BMIT Technologies plc, Malta Properties Company plc and Malita Investments plc all confirmed recently that the recommended dividends to shareholders will be distributed on the respective dates originally announced.

Several companies listed across the main international bourses also suspended their dividends as well as their share buy back programmes. In the UK, companies from various sectors cancelled their dividends with banks, insurance companies, advertising companies and housebuilders all following along the same lines in order to preserve their cash levels given the huge uncertainty being faced. The situation with Royal Dutch Shell plc is somewhat different. Despite the huge drop in the price of oil a few weeks ago, the company announced that it is proceeding with its dividend plans after it obtained a USD12 billion credit facility while reducing costs and cutting capital investment which would preserve a total of USD8 billion in cash. Royal Dutch Shell has sustained dividend payments to shareholders annually since the Second World War.

Given the uncertainty on the length of time before companies can start operating under slightly normal circumstances once again and the type of economic recovery that could take place afterwards, it makes perfect sense for company directors and executive management to be cautious in the current environment.

For most companies in Malta the reporting season comes to an end in two weeks’ time. As such, several other companies will be publishing their 2019 annual financial statements in the coming weeks unless these are delayed in line with the statement issued by the European Securities Markets Authority (ESMA). It would not be surprising for a number of these companies to refrain from committing to any dividends until the situation becomes clearer.

Naturally, this is a major blow for the large number of investors who depend on dividend income to supplement their pension and other sources of income. With interest rates on bonds having dropped to very low levels in recent years, an increasing number of investors resorted to a higher allocation to shares in search of superior yields. While dividends look set to be lower over the coming months, the extent of dividends that companies may opt to distribute in the near term is entirely dependent on the length of the economic disruption and the strength of the ensuing recovery.

In many cases, the dividend cancellations or delays must be viewed as part of the price that must be paid to ensure the long-term survival of a company. Given current circumstances which were impossible to envisage only some weeks ago, the investing public will have to accept this new norm and hope for better times in the years ahead.

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