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ITI Capital: Suspension of dividends in response to crisis (Global markets + Russia)

13 May 2020
ITI Capital: Suspension of dividends in response to crisis (Global markets + Russia)

Companies all over the world cut or cancel dividend payouts, especially financial (banks and insurance agencies) and state-owned companies in line with recommendations from governments and central banks

U.S. and global dividends cancelled at fastest pace since 2009

  • Companies all over the world cut or cancel dividend payouts, especially financial (banks and insurance agencies) and state-owned companies in line with recommendations from governments and central banks.
  • Many companies that have always made stable dividend payouts, even when oil prices dropped to single digits, have slashed dividend per share - for example, Royal Dutch Shell cut its dividend for the first time since 1945 - by as much as 66%.
  • We expect the payouts to resume not sooner than the end of 3Q20.
  • More than 140 U.S. companies have reduced their payouts to shareholders so far this year, with most of them (more than 80 companies) in April, on pace for the worst year since 2009 when there were 316 such cuts.
  • GM, Ford, Delta, Carnival, Boeing, Macy and others were among the first to announce the cuts.
  • In the previous 10 years, 55 companies eliminated their dividends.
  • All the dividend actions so far add up to savings of about $23 bln, according to S&P Dow Jones Indices, roughly 5% of all dividend payouts in the U.S. last year.

U.S. companies dividend actions

U.S. companies dividend actions

Source: S&P Capital IQ

Against this background, the Russian market looks even more attractive

  • Some 70% of the dividend actions worldwide account for suspension of dividends, with the bulk of them in the U.S. On average dividend payouts in the U.S. amount to $450-500 bln per year (last year - $491 bln), which is the world’s highest due to high dividend/net profit ratio (about 70%) and therefore is very important for the market, given high free float (about 80%). In Russia, the average dividend/net profit ratio is 42% (slightly above average), while free float stands at 33% (one of the world’s lowest).
  • Meanwhile, the U.S. average dividend yield is one of the world’s lowest (about 2%) due to high share prices, which is reflected in multipliers, while Russia’s dividend yield is five times higher. However, due to stock market crash in March, the U.S. dividend yield rose to 2.6% from 1.73% at the beginning of the year.
  • Dividends and buy-backs account for 40% of the return investors get from the U.S. equities, a gauge that has always been steady or on the rise, unlike this year. Therefore, we believe that this is a short-term suspension and the payments are on track to resume in the third quarter. See the annex.
  • Overall, most of the dividend actions affected the oil and gas, financial and industrial sectors.
  • In Russia, before the start of the dividend season, as few as seven companies announced dividend changes and only five cancelled payouts (Tatneft, Headhunter, IDGC Center, IDGC of Volga and TMK). The other five have only suspended decisions on dividend payouts.

Companies that increase dividend payouts

  • “If you increase your dividend, you are pounding the table that you have confidence.” “If you’re cutting, you are capitulating. You are saying times are going to be bad for a little while.”
  • ExxonMobil, Chevron, Johnson & Johnson and Procter & Gamble are known as dividend aristocrats, firms that have increased their shareholder payouts every year for at least 25 years. S&P has an index that tracks 64 companies in its benchmark index that meet the criteria.

Divs aristocrats, number of consecutive years of increasing divs

Divs aristocrats, number of consecutive years of increasing divs

Source: S&P Dow Jones Indices

Key source of liquidity for investors in the U.S. equity market

Key source of liquidity for investors in the U.S. equity market

Source: Bloomberg, ITI Capital

Dividend payments in cash, $ bln, in 2019 for 2018

Dividend payments in cash, $ bln, in 2019 for 2018

Source: Bloomberg, ITI Capital

Annualised dividend yields worldwide, %

Annualised dividend yields worldwide, %

Source: Bloomberg, ITI Capital

Best annualised dividends amongst S&P 500

Best annualised dividends amongst S&P 500

Source: Bloomberg, ITI Capital

Dividends in Russia (announced)

Dividends in Russia (announced)

Source: Bloomberg, ITI Capital