Olly Russ

A sector-by-sector look at Europe’s worst hit, and most immune, dividend payers

Olly Russ

Many European companies have chosen, or been compelled, to cancel dividend payments in light of the short-term impact on earnings.


Some companies have simply cancelled their dividends for this year; others have suspended the dividend, to be resumed at some unknown future date; while several have reached the half-way house of reducing the payment. One thing is for certain, if ever a company felt the need to rebase its dividend, the corona-crisis has given it the perfect opportunity. As for buybacks, they were naturally the first casualty.


So far in the European Income Funds we’ve seen roughly half of companies proceed with dividends as planned, about a quarter suspend dividends, and another quarter either cut or cancel payments. Barclays Research has produced the following table of dividend cuts by sector for the STOXX Europe 600 Index, which broadly reflects the Fund’s experience of the worst hit areas and the most immune.

Companies that have modified their dividend proposals by sector


Looking at the Fund’s holdings one sector at a time, we find that healthcare stocks – rather unsurprisingly – are among those to have navigated the crisis well. Whatever happens in the future, it seems health budgets will rise worldwide, and stockpiling of medical equipment and medicines will become more prevalent as politicians give the stable door a good slam. The spending spigots of healthcare were opened to the max during the crisis, and it may prove difficult to close them off again.


Healthcare is a European niche – Swiss company Roche has hit the headlines with its testing kits for coronavirus, which will no doubt see brisk demand for the foreseeable future. It paid its (increased) dividend as usual in March, as did fellow Fund holdings Novartis and hopeful vaccine contender Sanofi in May. All three companies are expected to raise payouts again next year.


Utilities have also proved rather resilient to events. Within the Fund, Italian grid operator Terna will pay as normal in June, as its business has seen only minimal disruption. Spanish generator Endesa will have suffered from the fall in industrial demand for electricity, but will also pay an increased dividend next month as usual. Finnish company Fortum has paid its customary 1.10 as normal, and our new position in Norwegian energy retailer Fjordkraft also paid as expected.


Real estate is somewhat surprising to see at the top of the table, but here our French holding Nexity has confirmed it will pay a reduced 2 (from 2.70 expected). Kaufman & Broad has announced a 30% reduction from its original plan, but will still pay 1.75, providing a yield in excess of 5.5% with capital performance in line with the market year to date.


Slightly less surprising is information technology, where companies have seen earnings largely supported through this crisis as demand in semiconductors and software services have remained strong – perhaps helped somewhat by the transition to working from home driving new demand. Fund holdings BESI and VAT both reported strong earnings and paid dividends in full, with VAT even stating that it expects to see an improvement in sales in the first half of this year vs last year.


Consumer staples have in general benefited from stockpiling and perhaps also comfort eating, with the exception of the salmon farmers, who have lost the restaurant trade. Accordingly, all our holdings bar Mowi, the Norwegian salmon farmer, will pay as normal.


Materials is not a huge sector in Europe, but our long-held gas giant Air Liquide paid an increased dividend with no difficulty. More surprising though was the world’s biggest chemicals conglomerate – BASF – which also left its original dividend proposal unchanged at 3.30, representing a 10c increase on last year.


Telecoms (or communication services under the sector split of the Stoxx Europe 600) is one sector which might reasonably be expected to do well from the lockdown, as people are forced into more mobile telephony and video meetings. Many telcos, however, also operate TV services, led by sporting rights, which has been a tricky sell with all sporting events cancelled. Our long-held Finnish operator Elisa paid as usual an increased dividend, while Telenor also left its dividend policy unchanged. Swedish Telia, impacted by a recent unfortunately timed media acquisition, did cut its dividend from SKr2.45 to SKr1.8. The Swiss operators Swisscom and Sunrise both paid in full as expected. Portugal’s NOS did cut its dividend by 21%, although this probably owed more to upcoming 5G auction costs than Covid-19.


In the energy sector, Equinor was the first oil major to cut its quarterly dividend (by two thirds) – ahead of Royal Dutch Shell. This was somewhat surprising given that it is generally regarded as having one of the strongest balance sheets in the sector and is profitable down to US$25 oil. However, the ownership structure may explain this anomaly – it is two-thirds owned by the Norwegian state, which probably thought the politically correct thing to do was to cut shareholder payouts. Total, by contrast, slashed the CEO’s pay, but left the dividend untouched. ENI in Italy also said it was premature to cut the dividend, and promised an update in July, whilst paying as expected in the current quarter. It’s worth noting, perhaps, that Brent crude has doubled from the April lows to now reach over US$35 per barrel.


Financials is the sector very much in the spotlight at the moment, as investors still retain the herd memory of the global financial crisis. Banks were immediately placed in the crosshairs, as presumed loan losses from the economic devastation to follow the Covid-19 response were expected to wipe out profits and therefore dividends. Bank management teams have taken up-front provisions to cover an expected surge in credit losses. Against this background, authorities have generally loosened capital requirements, taking pressure off banks, but as a quid pro quo the ECB has effectively forbidden capital distributions until at least October. The central bank wants a healthy financial sector ready and willing to lend, and therefore with capital to burn.


Investors, on the other hand, rely on banks to provide decent dividends – they are not really growth stories in the current market for credit. Banks were therefore rather frustrated at not being allowed to pay dividends when they regarded themselves as ready, willing and able to do so.


In a statement of intent, ING announced that the 2019 dividend it expected to pay this year has not been added back to capital, showing that it still intends to distribute it when allowed. Swedbank has deferred its decision on dividends until later in the year, presumably when the regulatory heat is off, as did Nordea. Banca Farmafactoring in Italy meanwhile stated ‘BFF is confident that it will be able to distribute the Expected Cash Dividends, in absence of further regulatory interventions, as soon as the banking authorities conditions are met.’ Interestingly, the Swiss banks, sitting outside the jurisdiction of the ECB, have continued to pay cash dividends.


In insurance, the European regulator has also recommended not paying dividends for the time being, but as this body (EIOPA) lacks the political clout of the ECB, many insurers have ignored its advice and paid anyway. Again, the Germans and Swiss are notable in their determination to pay as expected and should acquire a quality premium as a result. Axa is under more domestic political pressure but has so far merely deferred the decision. Sampo cut by 32%, but this was inevitable as its own dividend relies heavily on Nordea (in which Sampo is the major shareholder).


The asset manager Amundi (Europe’s largest by AUM) also deferred its dividend decision until later in the year, but signalled a clear intent to pay something, given its capital CET1 ratio now exceeds 20%. Italian Anima paid as usual.


Industrials were probably one of the first sectors into this crisis, given its large exposure to China both as a supplier and a customer. Deutsche Post, with its international parcels business DHL, announced its intention to pay an increased dividend, albeit later than usual, even as it saw the early signs of China’s post lockdown recovery. Belgian postal operator Bpost omitted its final dividend payment and announced it would seek to clarify its policy later in the year, although a dividend policy review had been long expected under the new CEO.


Facilities managers ISS and Coor both suspended their dividends. ISS said it would wait for more clarity around the Covid-19 situation, although Swedish Coor has taken the view that since they have accessed the various furlough schemes for their extensive workforce, dividend payments are very likely prohibited this year.


Lift maker Kone got its increased dividend away before the crisis really hit the west, while Swedish bus operator Nobina cancelled its dividend as public transport was shut down or reduced across Scandinavia. Construction and concession giant Vinci faced domestic political pressure, but only reduced the final dividend by 45%, no mean feat given its exposure to toll-roads and airports, and testament to the group’s financial strength.


Finally, consumer discretionary (which in Europe is primarily the auto sector) was badly hit as an industry already in turmoil. Daimler announced that it did not in fact require state support, and as such was sticking to its original dividend proposal, albeit postponed, but this had already been reduced prior to Covid-19. Italian coffee machine manufacturer De’Longhi cancelled its dividend, while retailing behemoth Inditex deferred its dividend decision amid having its entire store network effectively closed. Swedish outdoor equipment maker Thule also cancelled its dividend for the year, with demand for outdoor sports equipment in Europe and the US perhaps not being as strong as it might have been this spring, although the group remains financially strong.


In summary then, the picture is not perhaps quite as bleak as first imagined. Many of these suspended dividends will most likely reappear as specials in the autumn, when the media and politicians are looking elsewhere. Some of the more astute politicians are aware that cutting dividends has a deleterious effect on pension funds, and if a company has the cash to pay out to shareholders, there is no merit in withholding it, as this simply damages long-term return on equity for no useful purpose.


Certainly, this crisis will help to sort the dividend aristocrats from the herd, with those maintaining payments – like the reinsurance sector – perhaps being duly rewarded in the future.


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Key Risks

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. Investment in Funds managed by the European Income team involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The Fund’s expenses are charged to capital. This has the effect of increasing dividends while constraining capital appreciation. Investment in the Liontrust European Enhanced Income Fund writes out of the money call options to generate additional income. These call options will be “covered”. Unitholders should note that potential capital growth of the Fund would be capped if these call options are exercised against the Fund and the Fund’s capital returns could therefore be lower than the market in periods of rapidly rising share prices.


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Tuesday, June 2, 2020, 1:39 PM