Dividend opportunities for institutional investors amid coronavirus crisis
Public companies are deferring long-term capital expenditure, pausing share repurchase programs and cutting dividends to deal with the economic fallout of the coronavirus crisis.
But companies in the health-care and information technology sectors are proving to be more resilient, said Nick Getaz, vice-president and portfolio manager in Franklin Templeton’s equity group, in a webinar on Thursday. “At this point, [those] are — generally speaking — a little less vulnerable than more cyclical areas, such as energy, where we’ve already seen some dividend cuts take place. We feel pretty good [about] health care, IT — certainly two areas that are pretty well-positioned, given the current circumstances, to maintain dividends.”
To date, around 40 U.S. companies have made dividend cuts, said Matt Quinlan, vice-president and portfolio manager in Franklin Templeton’s equity group, also speaking during the webinar. “It’s typically a sign of significant stress. It’s one of the last levers that companies try to do, or feel like they have to do, to get on the other side of whatever trouble they have.”
While the last couple of years have seen moderate dividend growth of around eight to nine per cent, the firm expects 10 to 25 per cent dividend cuts for the broader market this year, he added. “Companies are making the appropriate choices for right now. There’s a lot of uncertainty, they’ve obviously pulled their guidance in many cases, because they just don’t know what is out there. But I think companies are certainly being more conservative and we’re seeing that reflected in some of the dividend growth.”
During the crisis, some companies have attracted criticism for continuing their share buyback programs and dividend payments while laying off employees. However, dividend growth in a time of economic stress doesn’t have to mean underlying problems with company culture, said Getaz.
“A company that can commit to paying a rising dividend through good markets and more difficult markets, we think, is a company that tends to benefit from substantial advantages,. One of the advantages — and we pay particular attention to this — is the culture of these sorts of companies, the degree to which [they] have a very cohesive, well-functioning culture that permeates, not just from the highest levels of management but also has a bottom-up influence. We think that these kinds of cultures and this level of sustainability that allows for these companies to continue to generate the kind of performance over the long term typically comes about through healthy relationships with employees and through their supply chains.”
As well, added Quinlan, investors are seeing fewer share repurchase programs during the crisis. Even Apple Inc. halved its program. “It’s an obvious area for companies to avoid, it does lead to some [public relations] problems, particularly if you’re letting staff go at some point.”
In the next 12 to 18 months, there will be opportunities for dividend stocks in the consumer sector, he said. “There has obviously been some retrenchment. Consumer behaviour is likely going to be significantly different . . . [with] a lot of shifts in how consumers spend. But if we can get on the other side of this, there’s going to be pent-up demand within [the] consumer.”
Certain clothing retailers could see strong buying opportunities from a merchandise standpoint, with additional benefits from their competitors’ current difficulties, noted Quinlan. As one example, Target Corp. has invested heavily in its curb-side delivery program, is doing home delivery and has shoppers that can put together orders for specific consumers.
On the the health-care side, Ecolab Inc., a water, hygiene and energy technology and services company, also looks promising, said Getaz, due to its exposure to commercial cleaning and sanitizing products and services and its growing presence in hospital, health-care, food services and production settings.