Dividends are like comfort food for the investing world. Their steady income payments can help investors support a sustainable retirement and provide succor when the underlying company’s stock takes a header during a market downturn like the one we just went through. But the current pandemic crisis was like no other downturn.
And in a recent research report, UBS analyst Victoria Kalb discussed what shareholder distributions could look like after Covid-19. Specifically, she asked, would share buybacks and dividends become socially unacceptable among some investors?
The dramatic global economic shutdown that began in March has stanched the cash flow at countless businesses and led to drastic actions to preserve funds. The roster of corporations cutting or suspending their dividends includes Ford Motor Co., Delta Air Lines, Freeport-McMoRan, Boeing, Darden Restaurants, Macy’s, Marriott International, Schlumberger, Dick’s Sporting Goods, Las Vegas Sands, the Walt Disney Co. and many others.
And sectors ranging from banks and airlines to hotels and energy companies have experienced a spate of suspended share buyback programs.
In her report, Kalb noted that well-run companies will seek to maintain a balance between sustaining their long-term financial health and servicing providers of capital. But Covid-19 pressures could upset this balance in at least three ways:
-
Cash flow may not be available to pay dividends because of business stoppages or slowdowns.
-
Cash-flow generation could be permanently lower in some industries if consumer behavior changes.
-
What is considered to be an optimal stakeholder balance may also change, reflecting a greater dominance of the "social" component within the environmental, social and governance, or ESG investing paradigm.
“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 wrote.
Does that mean dividends run the risk of being politically incorrect, or at least stigmatized to some degree, within ESG investing circles or elsewhere?
“It depends,” said Erika Karp, founder and CEO of Cornerstone Capital Group, an impact investing advisory firm. “If we’re talking about government spending and government stimulus and bailouts of any sort … if we’re talking about money that belongs to the public and then that goes to the companies and they distribute it, there’s a major problem there. That’s something that exacerbates income and wealth inequality, which is already a pretty serious problem.”