Death knell for dividends as firms try to save cash amid Covid-19 crisis

Having triggered the wiping of more than $25 trillion off the value of public companies globally in the past five weeks as it wreaks havoc on health systems and economies, Covid-19 is now attacking another investor staple: the corporate dividend.

A slew of companies listed on Dublin's Iseq index – from service station group Applegreen to insulation giant Kingspan – have scrapped multimillion-euro dividend payment plans in the past 10 days. Others, such as housebuilder Cairn Homes and Ryanair, have suspended share buyback programmes designed to boost their earnings-per-share figures and stock price.

The moves echo decisions by boards around the world with businesses scrambling to save cash as they warn on profits amid an unprecedented economic shock. Avoiding negative headlines of companies lining shareholders’ pockets as governments commit trillions to keep businesses and households afloat is another factor in such decisions.

Many of the companies lining up for US government bailouts and assistance – including aircraft maker Boeing, the airline industry in general and hotel groups – spent billions on buybacks in recent years, turbocharged by tax cuts brought in by president Donald Trump's administration in late 2017.

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"Dividends and buybacks are absolutely not on the agenda in the near term – and I suspect it will become 'socially unacceptable' to return capital to shareholders until the full extent of this crisis is known," John Cronin, a financials analyst with Goodbody Stockbrokers, said in a note to clients this week. "Capital and liquidity preservation are the order of the day."

Precautionary

For Noel O’Halloran, chief investment officer with KBI Global Investors in Dublin, the move by a swathe of companies to abandon dividend and stock buyback plans is sensible and precautionary.

“From an investor point of view, if anything, it’s a sign that companies are not in denial and hoping this all goes away,” said O’Halloran. “They’re reserving their cash and building up their liquidity balances in the event that this all goes horribly wrong.”

Grafton Group, the Dublin-based but UK-listed owner of DIY retailer Woodie's and builders' merchants Heiton Buckleys, said on Tuesday it was suspending its planned final dividend to save €32 million.

The company said it faces a hit to earnings as it shuts its massive builders’ supplies business in the UK for the next three weeks amid a lockdown announced by Boris Johnson’s government.

“The decision to withdraw the payment of the second-half 2019 dividend is unsurprising and understandable,” said Davy analyst Flor O’Donoghue. “The very near-term outlook is clearly hugely challenging and without precedent; however, we are confident that over time the strength of the Grafton business model and, in particular, its cash-flow generation capabilities will shine through.”

Housebuilder Cairn Homes, which had been buying back some of its own shares in the market up until Tuesday, announced the following day that it was suspending the €60 million programme, which was announced in January and more than three-quarters completed.

The board also decided to pull its proposal to pay a final dividend that would have cost €20.6 million as it suspended its full-year earnings guidance.

"For the moment, and aligned to Government guidelines, construction activity continues across each of our active sites under extensive health-and-safety protocols implemented to ensure the risk to employees and subcontractors from Covid-19 is reduced and to enable social distancing," said the company, led by chief executive Michael Stanley.

However, Cairn, which had been targeting up to 1,300 home sales this year, now expects completions to be "negatively impacted over at least the near term and possibly for an indeterminate period of time". Smaller rival Abbey, about 95 per cent controlled by the family of chairman Charles Gallagher, also ditched a plan to spend €2.1 million on an interim dividend.

Kingspan, the Cavan-based insulation giant, alerted investors last week, ahead of its annual shareholders’ meeting at the end of next month, that it too was scrapping its final dividend payment plan, worth €64.3 million, as it deals with “a rapidly evolving trading environment”. It has also cut staff pay by 40 per cent for and executive salaries by 50 per cent for two months to save money.

Analysts at Wall Street investment banking giant Morgan Stanley put Kingspan on a list of 14 "fallen angel" European stocks during the week – what it calls good companies that are now available at a better price for investors after an indiscriminate market sell-off.

"Covid-19 does obviously present downside risk to Kingspan's revenues, with construction spending linked to GDP growth," Morgan Stanley said. However, it added that the group, led by Gene Murtagh, will be able to undercut mineral wool insulation competitors as the key raw material for its foam products is a petrochemical product at a time of slumping oil prices.

“In addition, we think Kingspan’s balance sheet is secure with ample liquidity even in a stressed cashflow scenario,” its analysts said.

Dalata Hotel Group chief executive Pat McCann and his board abandoned plans for a €13.4 million final dividend. The group announced on Wednesday that it has had to temporarily let go of a "large number" of its almost 5,000 employees.

The company will seek to avail of emergency Irish and British government income support schemes to keep the employees on its books.

The company, which previously warned of a slump in bookings and raft of cancellations, is closing several of its locations for the time being as governments in Ireland and Britain restricted the use of hotels. But after it amended its banking facilities, it expects to be compliant with its lending covenants when they are tested in June.

“Given the uncertainty surrounding the length of the current crisis, and other possible initiatives that may occur, it is too early to predict the financial position at the end of December 2020 at this time,” it said, adding that the board was cutting its remuneration.

Forecourt retailer Applegreen was another to warn, on Tuesday, that it expected "a material reduction" in profits this year as footfall has plunged across its stores in Ireland, Britain and the United States.

The company is taking a number of measures – including the deferral of capital spending and director bonuses, and the scrapping of a final dividend for 2019 – to conserve cash.

Share buybacks

With its fleet all but grounded, Ryanair has also frozen share buybacks – having been in the market as recently as the eve of St Patrick’s Day repurchasing stock. It has spent well over €6.5 billion handing over money to shareholders through buybacks and other distributions since 2008.

Measures now being used to cut costs by the carrier include implementing a series of voluntary leave options, and halving pay for two months for staff and managers, including group chief executive Michael O’Leary.

In a piece published last Friday, he told the Financial Times that the airline has the cash for “maybe even 12 months” to survive with no flights or revenue, as coronavirus shuts the air travel industry down. The airline has €4 billion of cash and cash equivalents on its balance sheet as well as undrawn credit.

O’Leary said he was working on a best-case scenario of two to three months in which flights would be grounded and revenues would vanish, but said: “Honestly, none of us have any idea.”

Online accommodation booking group Hostelworld said on Thursday that it was scrapping its final 2.1 cent per share dividend and looking at other ways to make savings, as it expects earnings to be hit to the tune of €5 million in the first quarter of 2020.

Against that trend, the owner of Irish Ferries, Irish Continental Group (ICG) is sticking – for the moment, at least – to its plan to pay an almost €17 million final dividend to shareholders, led by chief executive Eamonn Rothwell.

But the group said this week that it had postponed its annual general meeting, where the matter would have been voted on by investors, from the previously scheduled date of May 12th to an unspecified later date.

“This decision has been taken in light of the current and developing situation surrounding Covid-19, recommendations from public authorities, and consideration of the health and safety of shareholders, attendees and staff,” said ICG.

Most other Irish companies are, for now, going ahead with planned AGMs over the next two months, but are heeding advice from their corporate lawyers to encourage shareholders to sstay away, tune in to special webcasts of the meetings, and vote on resolutions in advance by proxy.

The State’s two main banks are among those listed businesses proceeding with their upcoming AGMs, where their dividend plans will be voted upon.

"We are planning to hold our AGM on 29th April as previously announced," said a spokesman for AIB. "We are making arrangements for the meeting to be broadcast and for questions to be received and tabled in advance. The safety of our attendees and staff remains our top priority."

AIB, in which the Government holds a 71 per cent stake, is preparing for a €217 million payout, while 14 per cent State-owned Bank of Ireland is planning to disburse €189 million.

And while analysts say that Irish banks hold much higher levels of money in reserve to absorb shock losses as borrowers go into default as a result of the economic shock caused by Covid-19, some have cautioned against proceeding with dividends at this time.

"The Irish system is strongly capitalised, but the uncertainty creates unique challenges in determining the impact in a meaningful way," said Davy analysts Diarmaid Sheridan and Stephen Lyons. "In our opinion, it would be pragmatic for banks to suspend forthcoming dividend payments [on ordinary shares] until greater clarity can be provided. Should the impact be lower than currently feared by the market, dividend payments could then be resumed."

Elsewhere, regulators are beginning to step in. Norway’s financial supervisory authority wrote to the country’s finance ministry this week proposing that banks and insurers should be banned from paying dividends as the coronavirus unleashes untold economic damage.

German, Swedish and French regulators have urged their banks to hold back on share buybacks and think twice before paying dividends and executive bonuses for the time being.

Rainy-day capital

The Central Bank last week allowed banks to dip into rainy-day capital to give them additional leeway to keep lending during the coronavirus crisis. But it said it expected banks "to use the positive effects of these measures solely in support of the economy and not for dividend distributions".

Meanwhile, the prospect of AIB securing the go-ahead from supervisors in the European Central Bank for plans to distribute some of its estimated €1 billion-plus of surplus capital to shareholders this year is diminishing.

Building materials giant CRH, which has spent €1.8 billion buying back its own stock in the past two years, has so far held off extending the programme since the last leg of the current scheme was completed on March 10th. Both the scheme and the company's planned €494 million final 2019 dividend are understood to be under active review.

It may be too much of a step, however, for group chief executive, Albert Manifold, to scrap a shareholder payout entirely. The chief executive recalled in an interview with The Irish Times in 2018 how he was approached two years earlier in Thurles, Co Tipperary, by a man with an extended hand.

The man told Manifold that CRH, in continuing to pay a dividend during the financial crisis, had helped keep his head above water as other investments and his business tanked.

“That’s who I work for,” Manifold said in interview. “I don’t work for [investment firms like] BlackRock or Wellington. I work for him. That’s what keeps me going.”

On the whole, however, companies will be supported by shareholders for hunkering down and reining in dividends during the crisis, according to O’Halloran at KBI.

“When we come out the other side, there’ll be companies, particularly the stronger ones, that will be able to reinstate dividends very quickly – and surprise, if anything, on the upside,” he said.

When that will be is anyone’s guess.