George Boyd-Bowman

What is the outlook for US dividends?

George Boyd-Bowman

Investors should be braced for companies suspending dividends in the US during the current crisis. But we believe that the extent of dividend cuts in the US may be less severe than in the UK, and companies on the other side of the Atlantic could play a more important role in providing portfolio diversification for income investors in the future.   

We have seen a slew of announcements in the UK which have led some analysts to suggest dividends for the UK market as a whole could fall by as much as 50%, or possibly more if the dividend futures markets are to be believed. 

The US dividend landscape is different in a few important ways which should prevent such a dramatic fall. Firstly, pay-out ratios are much lower – companies have not already been stretching themselves as much to continuing to pay (or growing as most companies aspire to) dividends.

Secondly, US companies tend to pay dividends on a quarterly rather than half-yearly basis, so each quarterly payment is a smaller chunk of increasingly stretched working capital.

Finally, US companies have typically chosen to have a more balanced method of returning capital to shareholders, with buybacks the more variable tool on top of a steadier dividend.

Thus, it will be buybacks that will be foregone first. We have seen this already with the largest banks suspending buybacks for the time being.

There is an interesting debate about whether companies which, on most normal metrics, wouldn’t need to suspend dividends should indeed do so. In a “normal” environment, the signalling effect of not continuing to pay a dividend, which shareholders typically feel is either implicitly or explicitly promised, would be extremely damaging.

We are not convinced that companies (and their share prices) will be punished in the same way during this crisis. In a world where corporate social responsibility is increasingly important, witness the substantial rise of investor interest in ESG and sustainability, companies could well be seen to be doing their bit by conserving cash flows and preserving employment.

Should some US companies choose to temporarily suspend dividend payments, we don’t believe this alters the medium and long-term potential for the US to become an increasingly important source of dividend income for UK investors. The lower pay-out ratios will allow future dividend growth rates to be sustainably much higher.

While suspended dividend payments are likely to be transitory, perhaps one more structural outcome of the COVID-19 crisis will be that UK investors will reduce their over-reliance on UK companies to produce their ever-important dividend income. The US has a big(ger) part to play in this. 

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Thursday, April 2, 2020, 1:25 PM