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Companies around the world are taking drastic action to adjust to the impacts of Covid-19 pandemic as corporate topline is tumbling let alone bottomline! While some changes are normal, others are far too difficult to manage which is prompting well-renowned businesses and banks across Europe and even Australia to withdraw their earnings guidance, postpone or even cancel dividend payments and formulate a suitable line of defense.
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Recently, it was announced that the French government is actually instructing companies to refrain from paying dividends for them to receive the state funding in the wake of health and economic crisis. On a broader scale, the European Central Bank has also called out on banks in the Eurozone region to not pay dividends for the duration as the Covid-19 pandemic lasts.
The national banking regulator in Norway has pleaded the finance ministry to intervene and urge the companies to suspend dividends.
Likewise, in Australia, more and more firms are bowing to the building pressure and cancelling or postponing dividends as market sell-off continues.
Retail travel agency operator Flight Centre Travel Group (ASX:FLT) disclosed its immediate plans in late March 2020 to curb the impact of Covid-19 outbreak, which includes three-pronged plan to prepare ahead of downturn in demand that could last long as government have imposed harsh restrictions on travel and people practice social distancing. Not just Flight Centre Group, other airlines companies and aviation sector as a whole is facing the wrath of a rather unforeseen natural health calamity. The company has also cancelled its ordinary fully paid dividend under its response plan to Covid-19 even though it delivered $ 12.4 billion TTV in first half, up 11.2% on pcpwas on track to deliver record 2020 fiscal year (FY20).
Likewise, Qantas Airways, the operator of Qantas (full-service carrier) and Jetstar (low cost carrier), recently announced to have executed a new round of debt funding whereby the company secured $ 1.05 billion in additional liquidity to maintain its strong cash position. The Company has also deferred its interim dividend previously scheduled for payment on 9 April 2020 to 1 September 2020, considering it a prudent step at the backdrop of the current circumstances.
Not just these companies, most of the heavily impacted companies are working and preparing to deal with a rapidly changing environment and formulating plans to control costs wherever possible, preserve cash, as well as secure additional liquidity for the short-term.
The problem of liquidity eventually goes onto cause the issue of insolvency. Economistsfrom different countries are predicting that companies that do not have access to loans, or unable to issue debt are likely to have a challenge of insolvency coming their way. As economic activity has contracted with people inflicting self-isolation, imposition of quarantine by all governments across the world, it becomes largely imperative at this point for small as well as large businesses, particularly publicly traded corporations,to put in place stringent measures and manage their capital allocation, which is one of the most important responsibilities of a company’s management.
In the medium to long term, an efficient capital allocation, which is basically distributing an organisations financial resources, serves the benefit of the shareholders too. At this point of major slump for economies around the world, the management decisions to cut back costs and manage cash flows, will ultimately determine how quickly a company will rebound and how much money is returned to shareholders when things return to normal.
Market participants actively involved in investing into equities, should specifically look out for those companies that require very little reinvestment to keep their business afloat, although reinvestment is certainly an option if growth prospects are bright. These are generally referred to as Capital-light business models that take to minimal reinvestment and make fantastic investments for market participants because they offer more optionality.
Now, as the ongoing economic slump persists, more and more companies will declare deferred dividends to preserve cash and maintain strong balance sheets for the upcoming months as there is a lack of cash generation due to disrupted operations.
Some segment of the market participants such as investors planning for retirement and have dividend stocks as safe havens in their portfolios, would be quite affected for the time to come. They cannot anymore rely on all companies that initially claimed to pay regular dividends and thus portfolio adjustments would be required as believe it or not, seniors fear running out of cash more than they fear dying. Same goes for risk averse investors who have a load of dividend paying gems in their portfolios.
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It can be said that in current dwindling and uncertain economic and financial environment, traditional income investments may not work out for the best or at all. Bond yields are also falling giving a blow to the soon to be retirees. However, some of the well-established and blue-chip companies with dividend yields over 3% can still be relied upon to be added in a retiring individuals’ nest egg but due diligence plays an important role here.
Having discussed at length about dividends drying up, for a long-term investor with investment horizons of over 5 years, the current situation could be beneficial if one undertakes the required due diligence and builds a portfolio of robust balance sheet businesses. When the tsunami of fear hits, the market participants many a times behave irrationally and dump shares at the very wrong time. Thus, balancing the emotions and turning many stones could help the long-term investor to make good nest egg of quality portfolio.
