Gambling on dividends
Income-hungry investors will need to pick stocks carefully this year. But a dividend drought is not a given
If you’re hoping for dividends to rescue your share portfolio this year, you may be in for a rude awakening.
"I don’t think you are going to get a big cash-flow stream out of the local market this year. I expect that most of the industrial or consumer companies will not pay dividends because most of them don’t have very strong balance sheets," says 36One Asset Management co-founder Cy Jacobs.
He believes some of the larger rand hedge stocks like British American Tobacco and Richemont might continue paying, but there are other complexities introduced by Covid-19 that boards will grapple with as they consider declaring dividends.
"I think most will approach the issue cautiously, because they will prioritise looking after their staff. Anyone withholding or reducing salaries is not going to be paying dividends," Jacobs says.
In a country with unemployment levels that are already a national crisis and look set to get worse, paying out cash to shareholders while retrenching staff or cutting salaries could make corporates persona non grata at a difficult time.
A classic example is Bidvest, a bellwether for the local economy.
In a trading update for the 10 months ended April, the company said it had secured an additional R4.5bn in credit facilities to help it steer through the pandemic and was "strategically reviewing" its portfolio, which might lead to retrenchments.
Duggan Matthews, chief investment officer at Marriott Asset Management, which runs funds dedicated to investing in companies capable of paying and growing dividends, says many solid companies will halt or reduce payouts to allow them the financial muscle to make timely acquisitions as a shakeout from the weaker economy begins.
"Many have taken a conservative stance — they would rather retain cash on the balance sheet or potentially use it for opportunities," says Matthews.
This has seen some dividend stalwarts like Clicks, Pick n Pay and Life Healthcare, which have continued to grow revenues and profits, either scratch or cut dividends.
One company more than capable of paying a dividend in the retail sector is cash-flush Mr Price. Instead, it is going to the market to raise R3bn in fresh capital, potentially to buy some of its peers on the cheap.
Add two traditionally strong dividend-paying sectors — banks and property — becoming no-go areas, and the list of likelies starts looking awfully thin.
Unlike their peers overseas, SA’s big banks sailed through the financial crisis of 2008 and while share prices were initially hammered, investors still got money out.
This time, it’s different.
The pandemic, which strikes the economy at one of its lowest ebbs, has prompted unprecedented intervention by the Reserve Bank.
The deal implicitly agreed to is that the banks, which have received a relaxation on capital requirements, can use as much as R200bn made available by the Bank for Covid-19 loans guaranteed by the state.
In return, the banks are "strongly advised" not to pay dividends or bonuses, or engage in share buybacks.
That takes the red pen to Standard, Nedbank, FNB, Absa, Investec and even Capitec.
But this shouldn’t last long, says Matthews. "They [the banks] are well capitalised, so within 12 to 24 months they should be bouncing back. If they even pay half of the dividends they used to, you are getting them on a forward dividend yield of 5%-6%."
Local banks certainly aren’t alone. International Monetary Fund MD Kristalina Georgieva said last month that the world’s top banks — which distributed about $250bn in dividends and share buybacks last year — "should retain earnings to build capital in the system".
Until this year, the real estate investment trust (Reit) sector was an almost automatic bet for distributions.
Its corporate structure dictates that it pay out 75% of earnings in return for not paying taxes on income.
But with the retail sector particularly hard hit by the lockdown and many balance sheets stretched, many Reits are doing all they can to hold onto scarce cash.
In fact, the JSE has tabled a discussion document considering whether to allow for the suspension of distributions to enable Reits to regain their financial footing.
But, warns Protea Capital Management founder and CEO Jean Pierre Verster, "the whole situation could spiral". He says: "There could be an argument between the unit holders and the Reits regarding dividends. I think Reits might find it difficult to pay distributions and if they are forced to in the current situation, it will hasten their demise."
So where can dividends be found?
Resource companies are in a better state to carry on paying than most, given the rand’s 25% depreciation against the dollar this year.
The world’s major consumer of resources, China, is experiencing a sharp recovery in economic activity and expects GDP to be positive in 2020, after the pandemic led to a contraction of 6.8% in the first quarter.
Fear and uncertainty induced by the pandemic has also seen the gold price hover near eight-year highs at about $1,700 an ounce. Palladium is still relatively close to its record high, trading at $1,967 an ounce, while platinum has held up at $874 an ounce.
With the nature of deep-level mining in SA, gold and platinum companies are vulnerable to closures as Covid-19 hotspots.
"But there is a higher probability that they will continue to pay dividends," says Verster.
A dividend drought from corporates doesn’t necessarily mean that investors who have bought ETFs or unit trusts for an income stream will be left without any returns.
In Marriott’s case, for example, Matthews says its funds were "well positioned" moving into the lockdown because of its jaundiced view of the SA economy. As a result, the company increased its allocation to SA government bonds, reducing its local equity exposure but bulking up on offshore stocks.
And if there’s one company standing that may return both capital growth — in other words, an increase in its share price — and income this year, it’s Naspers/Prosus.
"While it pays a low proportion of its earnings as dividends, I think it is very likely that it will continue paying a dividend," says Verster.
When it comes to ICT, there seems to be broad consensus among the managers that Vodacom looks the most likely to grow its dividend, largely as the accelerated shift to working and shopping online has increased demand for data.
Vodacom recently declared a final dividend of R4 a share, bringing the total to R8.45 for the year ended March, an increase of 6.3%.
As a sign of the times, data usage increased by 110% year on year in April.
Other company-specific examples include short-term insurers such as Santam, which even with reduced premium income may see substantially lower claims than previously on account of the lockdown and gradual reopening of the economy.
In summary, dividends in 2020 will be the exception, not the rule.