There have been many devastating side-effects left in the path of the novel coronavirus as it has ripped across the globe in the past four months.
As well as the devastating cost to some families and communities, one the most obvious to investors and retirement savers is the destruction of corporate dividend income, with UK companies having scrapped around £30bn worth of dividends so far in 2020.
So, among the various questions that are being asked by financial analysts — what will the world look like after pandemic tails off, which behaviour will remain unchanged, will there be a ‘new normal’ — is whether the world of shareholder distributions be changed.
Those companies that maintain their dividend and/or share buybacks during the coronavirus crisis — as with any downturns — is usually a sign of confidence in the resilience of their operating business models.
When cash flows recover from the corona-crisis companies could return to prior practice – but there is a possibility that this may become “untenable” from now on, analysts at UBS have warned, and so it is not possible to simply predict that things will return to normal.
“We are not convinced distributions will return in the same fashion as and when (or if) cash becomes available,” said the bank’s sustainability research team, led by Victoria Kalb.
Under a worst-case scenario suggested this month by Link Group, dividends for the whole of 2020 could halve from their previous forecast level, resulting in the UK dividend yield dropping to 2% for the next twelve months, well below the 3.5% average for the past 30 years.
In a best-case scenario, which would only include cuts that have so far been announced or flagged, dividends would still fall 29% from their forecast level to £70.4bn.
But Kalb and her team suggest it will be difficult for things to return to normal and that the dividend landscape may be permanently changed.
One key reason is that Covid-19 has brought much greater visibility and attention upon the ‘social’ element of ESG and an increased focus on inequality, the analysts say.
“While it is, of course, too early to know if attitudes have changed permanently, closer scrutiny of social issues may make it more difficult to continue with (or restart) distributions in line with prior practice,” Kalb and the team wrote.
Of course distributions will resume, but the analysts think dividends “could be less controversial than buybacks” as dividends are seen as ‘strategic’ versus buybacks being ‘tactical’.
What is a fair distribution, what is ‘excess’ cash?
The definition of what is considered to be an optimal stakeholder balance also perhaps faces permanent alternation to reflect the greater dominance of the S in ESG than before the pandemic.
On a fundamental level, it seems quite possible that there will be less excess cash available to pay dividends or buybacks, from the likely business slowdowns in coming months and maybe years for some industries, which may mean cashflow “could be permanently lower in some industries if consumer behaviour changes”.
Furthermore, Covid-19 has highlighted “that resilience and ‘efficiency’ can be mutually exclusive”, the analysts point out, meaning there may be greater pressure placed on resilience by management teams and regulators.
Already, as banks such Lloyds (LON:LLOY) and RBS (LON:RBS) have seen, regulators have emphasised to companies the importance of “supporting the real economy” over remunerating shareholders in calling for dividend payments to be cancelled or postponed in recent weeks, have been this is an effect that could linger long.
Government responses to coronavirus are quite likely to include higher taxes, the analysts also suggest.
While previously governments might have wanted, but felt unable, to increase tax revenues to address things like climate change, inequality or economic crises – maybe one resulting from a pandemic — the analysts said this may bring extraordinary government responses in fiscal policy.