The theme of COVID-19 creating ‘winners' and ‘losers' continues to generate opportunities for investors. Each stage of the crisis has caused a shift in prices. From the build-up at the start of the year, through the panic of March and the gradual easing of lockdowns since then, stocks have experienced eye-watering price moves. Keeping up to date with the current driver of market sentiment has never been more important. A trending topic is the impact of the pandemic on stock dividend payments.
Global corporations are facing the challenge of deciding whether to pay a dividend to investors and if so at what rate. The change in mood may be less intense than a geopolitical shock such as a military flare-up in the Arabian Gulf, but the strength of it is immense. Individual firms and industrial sectors of the economy have already seen trends forming in their share prices and could provide ample trading opportunities for traders looking to profit from the shift.
Share prices may fluctuate, but the regular income payments from dividends are, for many investors, the most important thing. The exact percentage of the stock market owned by pension funds and similar long-term investors is hard to pin down. The number is, however, considerable and possibly more importantly, is steady. Speaking back in 2017, Gary Cohn, advisor to the US White House said:
“Who owns equity in the world today?” Cohn asked during the interview. “The big pools of equity owners in the world today are the pension funds. The biggest public pension funds are the biggest owners of equity in the world.”
At that time, a conservative estimate of the amount of US stocks owned by private pension, government pension and retirement funds put the figure at 20%. The challenge now facing these funds is that the stocks they've traditionally favoured, those with high dividend yields are no longer offering a secure return. When the ‘biggest owners of equity’ look to realign their portfolios, it moves the markets.
So far in the UK, approximately 320 listed UK companies have announced dividend cuts. In cash terms that equates to over £30bn or one-third of the total pay-out of the previous year.
The list of firms looking to shore up their balance sheet includes cigarette maker Imperial Brands and mining giant Antofagasta. Both firms have a core business which struggles to appeal to the more socially conscious investor. It has been the dividend that caused some in the market to hold their nose and embrace the stock. So there was a surprise this week when their names were added to an ever-lengthening list of FTSE 100 companies opting to hold on to cash.
The 1H price chart for Imperial Brands Plc showing how unpopular that announcement was with the market.
Imperial Brands Plc – 1H chart – 12th May – 21st May 2020
Imperial is a firm which has traditionally escaped the attention of short-sellers. The chart from short-tracker illustrates short interest going into Tuesday's earnings announcement was zero. The firm having never seen short interest over 0.6% since 2012.
Short Tracker – Imperial Brands Plc
The move may still not signify active shorting of the stock but more a rotation by big investors out of the stock and into something with a higher risk-return ratio. It could also represent institutional investors liquidating positions to generate the cash flow they are obliged to provide their investors. Either way, the stock is week-to-date down -5.83% while the FTSE 100 is showing a weekly return of +3.66%. The nine-percentage point divergence in what is traditionally seen as a low-volatility stock occurring in the space of only four trading sessions.
Imperial Brands Plc – 1H chart –15th May – 21st May 2020
FTSE100 – 1H chart – Friday 15th May – 21st May 2020
The shift most directly impacts funds which specialise in investing in high-yield stocks. The iShares UK Dividend UCITS ETF GBP Fund (Ticker:IUKD) is an exchange-traded fund (ETF) that aims to track the performance of the FTSE UK Dividend+ Index as closely as possible. It invests in the underlying stocks which make up the index and offers exposure to the 50 highest yielding UK stocks within the universe of the FTSE 350 Index.
ETFs are transparent, cost-efficient, liquid vehicles that trade on stock exchanges like ordinary securities. Their popularity as an investment vehicle is increasing, but a fund such as IUKD still faces the challenge of holding positions which are moving out of favour.
iShares UK Dividend UCITS ETF GBP Fund (Ticker:IUKD) vs FTSE 100 – 3-month price chart
That isn't only a trend in the UK investment community. The Nasdaq listed iShares Select Dividend ETF (DVY) shows a similar trend. The Fund seeks to track the investment results of an index composed of relatively high dividend-paying US equities and has over the last three months underperformed the Dow Jones Industrial average by nine percentage points.
iShares Select Dividend ETF (DVY) vs DJIA – 3-month price chart
A comparison to the Nasdaq 100 makes even more dramatic reading. The Nasdaq is comprised of firms with a higher weighting to capital growth that have no intention of paying dividends. Holders of those stocks won't miss dividends not being paid because they never were. The year-to-date divergence between the Nasdaq and Dividend ETF is currently at more than 30 percentage points.
iShares Select Dividend ETF (DVY) vs DJIA vs Nasdaq – YTD price chart
Concerns about the health of big-dividend payers date back even further. With the stock market at the mature leg of the longest bull run in history, each earnings season has been monitored closely. The feeling is that there would eventually be a recalibration of earnings dragging on the performance of dividend stocks and funds for some time.
iShares UK Dividend UCITS ETF GBP Fund (Ticker: IUKD) vs FTSE 100 – Five Year price chart
Traders looking to jump on to an established trend can take positions in the dividend indices or the individual stocks that make it up.
In the UK, most of the biggest payers have already announced their dividends for this year. National Grid Plc is yet to do so and will announce its full-year results on the 20th of June. The utilities giant has mirrored the broader market, and it rallied from March lows, but the daily chart shows it is currently trading back below its 50 SMA.
National Grid Plc – Daily Candles – 3rd Oct 2020
Firms that are in the same peer group include Royal Dutch Shell, the FTSE 100's biggest payer last year. It recently announced the first cut to its dividend since 1945. The reduction in pay-out was considerable, the firm slashing its Q1 dividend 66% after citing a “crisis of uncertainty” caused by record low oil prices.
Bank stocks are also big payers and may come under increased pressure. Britain's largest banks Barclays, HSBC, Lloyds, Royal Bank of Scotland and Standard Chartered coordinated announcements that they would halt dividends for 2019 and through 2020. The process of coming to that decision even involved discussions with the Bank of England. Stock prices also face pressure from the risk of client defaults multiplying through the post-COVID economy.
Every trend has a bend in the end, and bottom fishers with the ability to hold stocks for long enough will be monitoring firms and sectors showing signs of distress. There are, however, signs that high-yield stocks are not yet out of the woods.
Government intervention, in terms of fiscal and monetary stimuli, is keeping the global economy above water; however, there is no ‘free lunch' for the companies benefiting from the financial intravenous injections currently being administered to consumers.
Retailing giant Tesco Plc stoked controversy by paying a £635m dividend at the same time as accepting a similar-sized tax break from the government. The intention of bail-outs, such as the business rates holiday package was to ameliorate the impact of COVID-19 not to support shareholders. Customer-facing firms such as Tesco are having to balance their appetite for dividend payments against the reputational risk of looking as though they are taking advantage of the situation.
Laura Suter, a personal finance analyst at AJ Bell, has pointed out another potential driver for a slide in high dividend stocks:
“While some investors might be hoping the end is in sight for these cuts, they could actually increase now the government has brought in stricter measures banning firms from using its loan scheme from paying out dividends to investors.”
Source: Head Topics
The key players in that tussle are so far holding their cards close to their chest. While welcoming the £200m borrowing limit for the so-called coronavirus large business interruption loan scheme (CLBILS), only 100 firms successfully accessed loans. A sign of how much corporate independence is valued. Rain Newton-Smith, the chief economist at the Confederation of British Industry, on Tuesday, said:
“Some mid-cap businesses urgently need access to larger loans to tide them over at this critical juncture for the economy. Bounce Back loans are the standout success so far among government packages supporting firms' cash-flow amid the crisis. Meanwhile, lenders are continuing to act at speed to get emergency funds to those businesses most in need.”
If that number swells, then a vicious circle could lead to a significant market correction. Dividends fall, positions are liquidated to finance obligations, and stock prices tumble. It would take very little for that process to lead to the market entering a tail-spin.