As of March 26, 2020, at least 71 publicly listed companies have adjusted their dividend policies — predominantly consumer discretionary companies (23), REITs (22), energy companies (11) and industrial (7) companies — and 51 of the 71 companies have suspended their dividend payments outright.
While this is a difficult and consequential decision for companies, primarily because shareholders count on these quarterly distributions to increase their total return, challenging times often require difficult decisions.
In crisis environments, many stocks trade primarily on the strength of their balance sheets versus their income statements. In other words, investors are assessing whether or not they have the financial wherewithal to cover debt payments and survive. In these cases, cash is king. Issuers need to consider all options to maximize cash flow, including scaling back capital expenditures, slashing general and administrative costs, drawing down lines of credit, renegotiating debt covenants, and suspending dividend payments.
To gain a better understanding of the implications of an altered dividend policy, we analyzed the companies that have taken this route and also conducted a brief survey with a group of institutional investors on this topic. Here are some observations:
- Capital preservation is critical. Keeping capital in the company rather than paying out dividends at this time is highly valued. While shares may look “cheap,” having a strong balance sheet, cash and liquidity is valued more than using cash on hand for dividend payments (or even share repurchases) at this time. This includes drawing down lines of credit, as long it does not trip debt covenants. Understanding a company’s cash burn rate is also critical.
- If management and the Board believe shares represent great value, the market will value personal share purchases to show confidence rather than company share buybacks.
- Most companies are likely weighing various options regarding dividend policies, particularly how that may interplay with drawing down their lines of credit (LOC). Some will do both, particularly in light of the memories from the 2008-2009 credit crisis when many firms could not access their LOCs.
- While memories are still fresh from the financial crisis of 2008-2009, many view the current situation as different given that it is driven by a virus, rather than a credit crisis. As such, credit lines may still be available through the crisis enabling some companies to delay or forestall a decision on dividend policy adjustment
- For the passive funds/ETFs that have strict bylaws regarding the continuous payment of a quarterly cash dividend to maintain stock ownership, we haven’t found any “tricks” that will allow a company to sidestep the sell trigger when a payment is missed. But individual funds may differ and companies may want to carefully consider their ownership composition, including reviewing top holders’ policies on ownership before eliminating a dividend.
- For actively managed dividend, equity income or value funds, there is usually a mandate around average yield that also leaves the door open for PM’s to own companies that do not currently pay a dividend. This could be why TJX Companies (NYSE: TJX) issued a second dividend-related press release clearly stating that the company intends to resume paying a dividend as soon as possible. If a company is suspending its dividend, it should highlight that is has full intentions to pay a dividend in the future; this might avert the selling of the stock in some funds.
- If a company has recently declared a dividend and is not in a dire financial position, it should wait a month or so for more clarity on the state of its business before deciding to suspend its dividend. Why suspend now and create shareholder disruption if management can wait to see what happens over the next few weeks?
- Some companies have moved to pay dividends in shares, through a Payment-In-Kind (PIK), which operates similar to compound interest, or a combination of shares and cash. While this is appealing from the standpoint of cash preservation, it can have a dilutive effect given current share price valuation, and companies need to factor in the implications of issuing shares at depressed levels.
- Some companies such as REITs are mandated by certain investor prospectuses to have a distribution in order to own shares, so cutting the dividend to a penny will allow them to create liquidity while still preserving a fund’s ability to own the shares.
View a list of the 71 companies that have adjusted dividend policy through March 25, 2020, and see how they communicated that to the investors in their press releases.
