Investors are turning their back on high-dividend stocks, worried that a growing list of companies postponing their annual general meetings is adding to the risks posed to payouts by the coronavirus outbreak.
AGMs and corporate reports are being delayed across the world as countries enter lockdown to halt the spread of the virus. As a result, dividend payouts, which typically require a confirmatory vote by shareholders, are being pushed back.
As anxiety over the outbreak began to weigh on markets a few weeks ago, the UK’s FTSE High Dividend Yield index held up slightly better than the broader FTSE All World index. But last week the high-dividend index dropped 14.6 per cent, compared with the broader measure’s 11.3 per cent fall, as fears grew that payouts would be postponed or cut.
In Germany, legislation stipulates that attendees must be physically present for an AGM. This has left companies such as car manufacturers Daimler and Continental, as well as Deutsche Telekom, with no choice but to postpone get-togethers until later in the year. Elsewhere, Swedish financial services company Storebrand and UK commodities group Glencore have both pushed back their AGMs, without setting a new date.
“Can companies actually pay the dividend if there’s not been a shareholder vote?” said Edmund Shing, global head of equity derivatives strategy at BNP Paribas. He said the question was adding to the uncertainty surrounding payouts, with investors already bracing for more to be scrapped as companies hoard cash.
Europe has a very concentrated dividend season, with the majority of ex-dividend dates — the deadline for shareholders to be eligible — falling in April, May and June, months during which lockdowns are set to persist.
The prospect of indefinite delays and cuts has hammered the prices of related derivatives. The 2020 dividend futures contract on the Euro Stoxx 50 index, which rewards investors according to the payout on those stocks, slumped from €122 on March 6 to €67 on Wednesday, implying a 45 per cent cut.
“If you’re trading dividend swaps, the AGM being moved is the difference between them being worth something or nothing,” said an analyst who covers German stocks.
Last week, Goldman Sachs said on a briefing call with clients that many income stocks were now being sold because investors feared that companies would not be able to have a quorum for an annual meeting, according to a person familiar with the contents of the call.
Computer-driven funds are among the traders that look to buy stocks before the ex-dividend dates in order to pocket the returns, and are probably now selling.
Shareholders are already concerned that stressed companies will be unable to meet their dividend payouts. “They may have to sacrifice [them] to manage their covenants and to keep some cash available,” said Emmanuel Cau, head of European equity strategy at Barclays, referring to clauses within borrowing contracts that cap distributions at certain levels.
Dozens of companies have announced that they will reduce their dividends, including car manufacturer Ford, while several, including Airbus and IT group Amadeus, have cancelled them altogether for 2020.
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Sweden’s financial regulator went as far as to urge banks to stop paying dividends to help protect the country’s financial system on Tuesday, while Norway’s financial regulator called on its government to do the same for banks and insurers on Wednesday. There is also the spectre of nationalisation hovering over some sectors.
Legislators could bring in new rules allowing AGMs to be held online. However, such lawmaking is unlikely to be a priority during the coronavirus outbreak, and some academics think it could weaken corporate governance overall.
The London Stock Exchange has given companies an additional 30 business days to pay dividends. Singapore’s exchange is allowing some businesses a two-month extension to hold shareholder meetings.
Some investors believe delays to payouts could be better for both companies and investors, in the long run. “It could be useful for them not to have to fund dividend payments at this time, but to defer them to the hopefully better times ahead, without having to cancel them altogether,” said Olly Russ, equity income fund manager at Liontrust.