Coronavirus cuts millions in dividends for Aussie shareholders
Income from dividend payments is one of the key motivating factors for share investors, particularly in Australia. Many long-term investors rely on ongoing dividends from companies and perceive those that pay them regularly as offering greater value in the long run.
However, in the current market turmoil, dividend payments may be deferred or suspended as businesses implement drastic cost cutting and profit protection measures.
To date, a number of Australian companies have announced deferrals, suspensions and cuts to their dividend programs. Some of these companies include:
- Flight Centre - cancelled a $40 million dividend payout as it gave priority to keep staff on the payroll amid closures of some travel centres
- Qantas Airways - deferred its $201 million interim dividend from April 9 until September 1
- Corporate Travel Management - deferring its dividend payment
While travel and tourism-related companies are the first to announce changes to dividend payments, analysts at Macquarie Bank are estimating about 40% of Australian listed companies may also be forced to cut or defer dividends given the current market environment.
Macquarie pointed out that during the 2008 global financial crisis, approximately 65% of stocks had their dividends cut. With the impact of the COVID-19 virus still being felt across the globe, there is a possibility of hitting the 2008 dividend cut levels again.
Why do companies cut or defer dividends?
In 'normal' or usual market conditions, a regular dividend distribution program is one of the signs of a company's health and profitability.
The more profitable a company, the better its capacity to distribute dividends to shareholders.
Given the current uncertainty and volatile market conditions, companies may resort to dividend cuts or deferment (as some companies have already done) to protect and conserve whatever profits they have accumulated. This is to ensure that they can retain staff, continue operations despite challenging market conditions and to ramp up operations once business conditions have improved.
In the circumstances, preserving the company's operations and financial stability is likely to take precedence over maintaining dividend payments.
Though this may mean a temporary reduction of income for shareholders, it will have a positive effect in the long-term if businesses can rebound and use the preserved capital once normal business conditions return. It could be a case of taking some a short-term pain for a long-term gain.
Should you rely on dividends?
While many Australian investors have grown accustomed to receiving dividend income, there are many other investors who have seen their investment portfolios grow over the years even without dividend income.
The fact is, many profitable and growth-oriented companies prefer to re-invest profits to grow the business further instead of distributing dividends. Companies that are constantly innovating and looking for growth opportunities may lean towards more expansion rather than dividend distribution.
Whether you're investing for the short-term or the long-term, dividend income should be only one of the factors you consider. It should not be the one and only metric you consider before investing in any stock. Remember, you also have to consider the potential for share price growth.
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