Beyond Bulls & Bears

Equity

Weighing UK Dividend Suspensions

As UK-listed companies in consumer-facing sectors cut or suspend dividends in the wake of the coronavirus pandemic, Colin Morton, portfolio manager, Franklin UK Equity Team, explains why the trend is likely to expand to companies in other sectors.

Fears over the coronavirus outbreak have left a heavy toll on global stock prices over the past weeks. Unsurprisingly, this persistent crisis is now starting to take a toll on companies’ dividend policies.

In recent days, several UK-listed companies have announced suspensions, omissions or cuts in dividend payments. As virus containment measures escalated in the United Kingdom and other countries, many businesses face the prospects of a significant drop in revenues—or no revenues at all—for the foreseeable future, while facing recurring fixed costs (e.g., rents, wages, leases, etc.). This places notable drags on working capital and liquidity positions, to an extent not witnessed even during the global financial crisis.

In this current crisis, some of the first companies to cut dividends so far have been in consumer-facing sectors such as retail, media, and travel and leisure. In our view, this trend is likely to grow, as measures to contain the pandemic intensify and impact other parts of the economy. For instance, companies in the construction and housebuilding sectors could be forced to take similar measures as building sites across the United Kingdom are halted.

While investors grapple with the numerous dividend policy announcements, we are careful not to tar all the companies in the same brush. As active stock pickers, we are spending time analysing businesses and identifying underlying rationales behind these announced dividend changes or potential changes to come.

Understandably, we are finding dividend cuts among companies with more levered balance sheets and/or in companies seeing significant impairments to their cash flow, impacting debt repayment capabilities. Yet in other instances,  even companies we view as having good-quality characteristics, including dominant market positions and resilient fundamentals, are choosing to forgo dividend payments at this time. These businesses seem to be taking pre-emptive actions to preserve cash and keep balance sheets healthy. This can be a prudent approach, in our view, and possibly the right thing to do given the exceptional market circumstances today.

Within our portfolios, tracking payout policies and dividend changes over time provides very useful insights into the financial health of a company, as well as the merits of its management team. As we assess the risk/reward profiles of our holdings, we are reluctant to sell positions in those businesses which we believe remain fundamentally sound, and which are demonstrating prudence and pragmatism by omitting a dividend payment or temporarily suspending a share buyback programme to better weather the storm.

In our view, select companies with suitable balance sheets and agile capital allocation policies will be able to prevail and withstand the activity slowdown in the long term.

It’s hard to predict how long this crisis will continue to weigh on company earnings and dividends—it could be months, quarters or even longer. Yet, we note very encouraging signs this month from China, which is gradually lifting restrictive measures, allowing the progressive return to more normalised activity levels. Signs of peaking new infections in Italy (among the most-hit countries in the Western world) are also very positive. Historical precedence would suggest that it may take clear evidence of the pandemic peaking before equity markets have the confidence to look beyond the immediate impact.

With regards to the Franklin UK Equity team, we remain committed to our disciplined and time-tested investment approach. We remain focused on fundamentals, valuations, and stand ready to take advantage of long-term opportunities that arise in the UK equity market.

 

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