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Corona Virus Chronicle (XII) - The Dividend Debacle

Looking across the quoted investment universe, it is difficult to pick a stock or sector that should continue paying a dividend at this time and we should expect to see dividend income fall at quite a rapid rate.

Financial Market Reaction - Dividends

A lot of recent commentary over dividends in the press and financial news channels. The shut down of business has led to companies looking at ways in which they can conserve cash. As this is being written Barclays is being pushed: by the press and actions of peer group European Banks, to withdraw the dividend that is due to be paid this Friday.


The detail of Barclays dividend debacle

It’s a difficult matter for Barclays, as the dividend was declared on the 13th of February and the Shares were marked as “Ex Div” on the 27th of February. This last date is important. It means all investment decisions in the stock are undertaken with certain knowledge that the value of Barclays Bank is depleted by the cash value of the dividend. The dividend is 6p per share and the number of shares outstanding is 17,329 million. The total value of the cash dividend is therefore £1,039 million, or 6.4% of todays market capitalisation.


So, for anyone who has recently sold this stock, after the Ex date and were holders before this date, then they still expect to receive the dividend. Should Barclays cancel it, they have effectively lost 6% for no reason as share prices tend to adjust lower to reflect the loss of the dividend from the balance sheet. If you had sold toward the end of March the stock, at this point was down almost 47%. Taking away the dividend is a real blow. Over this timeframe we can also see that trading volume has been very high, which, combined with a falling price means many investors have been sellers.


As you can see, it is not a simple matter to just cancel a dividend once the Ex date has been declared. Barclays may open itself up to further problems over such a late cancellation notice.Certainly, going forward, most Companies need to conserve cash and cancelling payments which are, after-all, pay-outs of historic profits makes a lot of sense at this time.

Banks are particularly aware of the need to conserve balance sheet strength.


The effects of the Virus are, potentially, long term periods of loan delinquencies on most types of lending. Over the past ten years, banks have sought to bolster balance sheets to counter cyclically induced periods of credit deterioration, but nothing approaching the scale of the virus problem has ever been factored into the regular stress testing programmes of bank regulators. The well known countercyclical buffer, which is a mechanism that allows bank regulators to automatically tighten lending standards at times of excess and reduce them at times of need is now very loose.

Why is this important?

Looking across the quoted investment universe, it is difficult to pick a stock or sector that should continue paying a dividend at this time and we should expect to see dividend income fall at quite a rapid rate. It is timely therefore to consider the effects of dividends on investment performance...

Companies need to conserve cash and cancelling payments which are, after-all, pay-outs of historic profits makes a lot of sense at this time.

Banks are particularly aware of the need to conserve balance sheet strength. The effects of the Virus are, potentially, long term periods of loan delinquencies on most types of lending. Over the past ten years, banks have sought to bolster balance sheets to counter cyclically induced periods of credit deterioration, but nothing approaching the scale of the virus problem has ever been factored into the regular stress testing programmes of bank regulators. The well known countercyclical buffer, which is a mechanism that allows bank regulators to automatically tighten lending standards at times of excess and reduce them at times of need is now very loose.

Looking across the quoted investment universe, it is difficult to pick a stock or sector that should, or can, continue paying a dividend at this time and we should expect to see dividend income fall at quite a rapid rate.

One piece of linking news this morning is that in spite of corporate bond spreads being at some of the widest levels seen for many years, investment grade companies are still issuing bonds at a rate which exceeds the average mount of monthly issuance by a country mile.


Why would any investment grade company rush to issue bonds at such a bad time? Of course the reason is the fear of not being able to access the markets in the future, but also the fear of having no near term liquidity for funding business. So it is an easy step to cancel dividends at this time.

We should also consider the implication of the fact. Cancelling dividends, the payment of historic profits to investors, opens a window into the minds of the executives of these Companies. Dividends tend to be paid, by successful, long term businesses.

The very fact that dividend payments, which are not just payments of profits, but statements of corporate standing and esteem, are being cancelled, gives an insight into the depths of the virus effect on many companies.

In a word.. “Yes”. Dividends form a substantial part of investment returns. There is debate over whether it is right for Companies to pay dividends at all. Indeed dividend payments have, increasingly become a controversial item, when considered in the context of some very aggressive investment strategies, which amount to debt fuelled asset stripping.

Putting the controversy of dividends to one side, it is interesting to see that since at least 1988, (the oldest Bloomberg data point for one of the indices shown) dividends have been responsible for providing the majority of returns for UK markets. The FTSE100 Index has provided a total return of 609% to the end of February this year. Annualised at 6.43%. The wider FTSE all share, incorporating the FTSE 350 and FTSE small cap indices has returned 746% equivalent to 7.03% annualised.

These returns can be broken down into price changes, which can also show the contribution to total returns made by dividends. Over this time frame, the results are quite compelling, in that of the FTSE 100’s total return of 609% only 260% or 42% of the return comes from capital change. For the All share it is only 38%. These statistics include the dividend, but not the reinvestment compounding effect.

If we were able to reinvest all of the dividend income as it is received then the return of the FTSE 100, over the same time frame is 1077%. Such is the power of compounding, that reinvested dividends serve to increase returns by 83% more than if you were to receive and spend all dividends. The 8th wonder?

So, dividends are important. The only caveat being, if companies did not pay dividends, would they be able to use the additional cash to better effect in the conduct of their business?

Peter Smart

Head of Investments

SaSo Strategic Advisers

30th March 2020

The commentary has been prepared solely for informational purposes for the recipient, it does not constitute an offer to buy any service, financial product or make any investment or a solicitation of offers to buy any service, financial product or make any investment nor should it be considered as investment advice. Any offers to buy any service, financial product or make an investment or solicitation of offers to buy any service, financial product or make an investment through the provision of investment advice will be made only pursuant to definitive agreements and other documents and information that may be subsequently provided.

Investing or dealing in any financial product should not be considered unless its nature and the extent of the exposure to risk is understood. All investments and financial products involve risk which include (among others) the risk of adverse or unanticipated market, financial or political developments and may include currency risk. Some investments and financial products might carry greater risks than others. Past performance is not a reliable indication of future performance. Investments can go down as well as up and involve the risk of loss.

The commentary is based on information generally available to the public and does not contain any material, non-public information. No representation, warranty or claim is made that it is current, accurate or complete.


SaSo Strategic Advisers Limited is regulated by the Jersey Financial Services Commission for the Conduct of Investment Business.


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About the Author


Peter Smart, Head of Investments

peter.smart@sasostrategic.com

01534 488778


Peter has been involved in investment markets since 1985, working within the private client areas of two global banks and for 22 years as the fixed income specialist for the UK Wealth manager, Brewin Dolphin.  More recently Peter formed part of the investment team at bridport in Jersey specialising in the provision of specialist, income focussed portfolio’s.



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