- As an impact of the COVID-19 crisis, several companies have rolled back their dividend distribution plans.
- However, some resilient businesses like CBA have been able to put money in their shareholder’s pockets, despite the ongoing uncertain environment.
- Lately, businesses have had been in the middle of a situation to choose between investor payments or maintaining resilient financial position for long term growth.
Dividend income has been one of the factors to keep hope of investors alive in the market, even in the time of crisis. With COVID-19 outbreak, several companies had withdrawn their distribution guidance, as well as outlook citing the gravity of uncertain events. However, some businesses have managed to fulfil their dividend obligations, notwithstanding the effects of coronavirus.
Here, we discuss two stocks that contrast between necessity of paying the dividend and choosing to maintain resilience in the business for long-term survival and future growth.
Scentre Group Suspends Distribution
In pre-COVID-19 era, the real estate company, Scentre Group (ASX:SCG) projected its distribution for 2020 to be 23.28 cents per security, indicating a growth of 3%. Back then, the Company was anticipating a further growth in distributions for coming years, in line with the growth in operating earnings.
A projection of the Company’s distribution in February 2020, as well as the previously announced forecast is depicted below in the image.
SCG Distribution Per Security (cents) (Source: Company's Report)
However, as per its recent update in May, given the backdrop of COVID-19 pandemic and volatility in global markets, SCG suspended its previously announced outlook for 2020 and decided to not pay an interim distribution for the half-year ending 30 June 2020. This roll-back of distribution was seen in the light of the uncertainty regarding the situation, its duration, the economic impact, and the timing of operating cash flows for the Company.
Moreover, SCG is of the view that retaining capital at this stage shall further fortify its financial position and help in gaining the ability to progressively deliver long term returns to its security holders.
Prior to the severity in COVID-19 scenario in January and February 2020, the operational performance of SCG remained strong; however, the context of SCG’s business, as well as the operating environment, took a hit in the month of March as the restrictions were put in place.
SCG shares strong support towards reopening of the economy as an increasing number of its retailers resume and reopen their store networks and engage with customers. Moreover, 57% of retailers representing 70% of the gross lettable area are open in Australia as on 11 May 2020.
With the opening of the retailers and an increase in customer visitation in recent weeks, the Company has drawn benefits from the strategic location of its centres during the period, where 496 leasing deals were finalised.
New Service Launched
Interestingly, in April, the Company launched a new drive-through, contactless click and collect service, Westfield Direct (which is accessible across all its Westfield Living Centres), has been fast-tracked to provide a safe and easy solution for customers. This further intends to enable customers to buy products online through numerous Westfield retailers in single transaction and pick them up through contactless drive-through available at local centres.
Expense and Capital Management
In order to target a reduction in centre operating expenses, the Company implemented a range of initiatives to reduce expenses of over 25% during the pandemic period, including 20% reduction in base Board fees and a 20% reduction in fixed remuneration for the Senior Leadership team.
Moreover, the Company extended its liquidity to $3.1 billion in April 2020, as well as all bank facilities that were due to mature in 2021 are now not maturing until January 2022.
Overall, SCG has been highly responsive in adjusting its operations according to the unfolding situation in Australia as well as New Zealand. The Company is currently undertaking the review of the timeline of forthcoming redevelopments and looks forward to providing an update around half-year 2020.
SCG stock settled at a price of $ 2.200, down by 3.93% from its last close, on 15 June 2020, with a market capitalisation of $ 11.89 billion, and has an annual dividend yield of 9.87%.
CBA Fulfills Dividend Distribution Obligation
Major banking and financial services related entity among the big four banks in Australia, Commonwealth Bank of Australia (ASX:CBA) has been able to deliver dividend payments for first-half of FY20 totalling $3.5 billion to its approximately 830,000 shareholders by the end of March. This has further provided additional direct cash benefit into the Australian economy.
Dividend History of CBA (Source: ASX)
Moreover, CBA announced a new additional credit provision of $1.5 billion during the month of May 2020 for the possible longer-term impacts of COVID-19, which further strengthened CBA’s already robust set of provisioning and balance sheet.
Agreement to Sell Stake in CFS
In addition to this, the Company also entered into the agreement to sell 55% interest in Colonial First State (CFS) to a global investment firm, KKR; however, finalisation of the transaction is subject to approvals from Australian Prudential Regulation Authority (APRA) and Foreign Investment Review Board. CBA expects the finalisation of the transaction during the first half of CY 2021.
The transaction is expected to result in CBA receiving cash proceeds of approximately $1.7 billion from KKR and implies a total valuation for CFS on a 100% basis of $3.3 billion. Moreover, the purchase consideration indicates a multiple of 15.5x (on a 100% basis) CFS’s pro forma net profit after tax of approximately $200 million (based on CFS’s underlying run-rate cash earnings as at 30 April 2020).
CBA believes that the transaction is in line with the strategy of CBA to create a simpler and better bank and focus on its core banking businesses, while allowing CFS to deliver a wide range of benefits for members and become a more focussed standalone business.
Major Deliverables from the Investment
Moreover, both the parties, CBA as well as KKR looks forward to undertaking a major investment program that shall reinforce CFS' position as one of the leading retail superannuation and investments businesses in Australia. The deliverables expected over time from the planned investment program for CFS comprise of a variety of significant benefits for its member base of more than one million Australians. These deliverables comprise of the following:
- Enhanced service experience throughout multiple channels, comprising faster investment in digital channels
- Improved access to member education, support, and self-service tools, to help Australians endure the difficulties of the superannuation and pension system
- Product offering made simpler, with choice for members and competitive pricing
- Contemporary technology systems to offer a market commanding superannuation service to members
The Bank shares a strong commitment towards supporting Australia during current challenging times and is well-funded with noteworthy levels of surplus liquidity and strong capital position. Moreover, the Bank’s strong capital position facilitated in the delivery of dividend payments to its shareholders for 1H20.
CBA Delivers for all its Stakeholders (Source: Company's Report)
Throughout March 2020 quarter, the Bank’s strength and resilience have been evident and it looks forward to continuously support the customers, as well as the broader Australian community.
CBA stock closed at a price of $66.300, decreasing by 1.515% on 15 June 2020, with a market capitalisation of $ 119.17 billion, and has an annual dividend yield of 6.4%.