Dividends are Disappearing

  • Companies are increasingly suspending or reducing dividends
  • Government loan rules and credit market turmoil crimp balance sheets
  • Goldman says S&P 500 dividends will reduce 38% in the next nine months

Investors are saying goodbye to their dividends as companies suspend payouts amid the COVID-19 crisis. Dividends are portions of company earnings distributed to shareholders to reward them for their trust. It's mainly large, older, well-established companies that don't expect blockbuster growth that do this. Global dividend payments hit a record $1.4 trillion last year, according to Janus Henderson. However, firms tend to stop this practice during a recession in order to save capital to survive the downturn. They also have to consider the optics of rewarding shareholders while employees are furloughed.

Recipients of loans under the $2 trillion CARES Act stimulus package are also prevented from buybacks or dividends until a year after money is repaid. Corporate America also has record levels of debt, which makes it less likely it will borrow to finance dividends.

As of March 30, 12 S&P 500 constituents had suspended or reduced their dividends this year. These include companies belonging to struggling industries like airlines (Boeing, Delta), hospitality (Marriott, Darden Restaurants), retail (Macy's, Nordstrom) and energy (Apache, Freeport-McMoRan, Occidental Petroleum). ICE Data Services says over 500 companies in the world cancelled their dividend last month. (see chart below) Nearly 70 of the top 600 listed companies in Europe and 8 of the top 100 London-listed companies cut or suspended dividends between Feb. 24 and March 31, a Reuters analysis found. This week the biggest banks in Britain scrapped dividends after the Bank of England pressured them to.

ICE data
Source: ICE Data Services.

Goldman Sachs analysts predict S&P 500 dividends will dry up by 38% over the next nine months and 25% for the full year from last year. In a recent note they said dividends will grow by 3% in 2021 and 12% in 2022. The dividend payout ratio, or the percentage of earnings passed to shareholders, is expected to rise to 40% this year from 35% in 2019 as earnings decline at a faster pace than dividends. It will then sink to 26% and 28% in 2021 and 2022 as dividends recover slower than earnings. 

Analysts have been sifting through companies looking for those that may suspend dividends in the near future. Even dividend aristocrats, like old oil companies Exxon and Chevron, may not be able to withstand what's coming. Jefferies global equity strategist Sean Darby looked at dividend coverage ratio to identify S&P 500 stocks most susceptible to a cut and General Mills, Evergy, Sempra Energy, Qualcomm and PPL made the top five. 

While dividends are not as prevalent as they used to be, many investors still rely on them for a series of recurring returns.