From Boeing to HSBC, companies are scrapping billions in dividends on coronavirus fears

Despite three major overhauls in the past decade and a series of reputation-damaging compliance missteps, investors have stuck with HSBC, in large part because of its consistent cash dividend.

When the bank threatened to cut off that income stream in the past, the bank’s shareholders – a third of which are retail investors – have reacted swiftly. After the bank said on April 1 that it was cancelling its already announced final interim payout for 2019 and not planning any further dividend payments, they sent HSBC’s shares to their lowest level since March 2009, the height of the global financial crisis.

HSBC’s shareholders are not alone. Investors globally have pushed companies into hefty payouts in the form of dividends or share buy-backs over the past decade – dividends totalled nearly US$300 billion worldwide in the fourth quarter alone.

That spigot of money, however, is turning off as companies ranging from Boeing to Marriott International to Volkswagen have cancelled or are considering suspending massive payouts because of the uncertain economic outlook or regulatory pressure in light of the coronavirus pandemic.

“What is happening right now is a very sharp near term shock to cash flows,” Eli Lee, head of investment strategy at the Bank of Singapore, said. “The near-term goal is to prevent these companies from going into bankruptcy and also for these companies to shore up their balance sheets if this shock becomes a far longer one than we think.”

One place that is apparent is the real estate investment trust space, where tenants are struggling to pay their rent during the downturn and governments are moving to allow affected businesses to defer rental payments, Lee said.

The coronavirus, known as SARS-CoV-2, has infected more than 1.6 million people worldwide and brought much of the global economy to a sudden stop as governments from Singapore to the United States lock down major cities to try to stop the spread. Covid-19, the disease caused by the virus, has killed more than 100,000 people worldwide.

The widespread disruption to air travel, global supply chains and daily life has likely sent the global economy into a recession. Bank of America Securities said in a research note last week that the downturn in Asia as a result of the pandemic will be worse than the global financial crisis in 2008 and the Asian financial crisis in 1998.

Kristalina Georgieva, managing director of the International Monetary Fund, said on Thursday the pandemic has disrupted the social and economic order “at lightning speed and on a scale that we have not seen in living memory”. Georgieva said the IMF is anticipating “the worst economic fallout since the Great Depression”.

The concerns over the economic outlook and the need for cash on hand has caused companies to aggressively tap lines of credit – borrowing about US$50 billion from revolving credit lines offered by JPMorgan Chase alone – and pull back on investor payouts at a rate not seen since the global financial crisis.

In a research report last week, Goldman Sachs economist Joseph Briggs said investment-grade companies in the Russell 3000 index will need as much as US$90 billion in new financing if the disruption from the health crisis lasts six months as companies from airlines to carmakers face a major cash crunch.

Activist investors have long criticised Japanese companies for sitting on large piles of cash for the proverbial rainy day, which now appears to have come.

Firms in the US and Europe are increasingly cutting dividends as they struggle between the difficult choices of continuing to pay their employees or vendors who are themselves seeking cash, said Benjamin Frost, the global manager for pay at the consulting firm Korn Ferry. “It is a question of who takes the hit,” Frost said in a recent blog post.

Janet Tsang, an investment specialist at JPMorgan Asset Management’s Asia-Pacific Income Fund, said this year will be a “challenging period” for dividends globally.

“Dividend investing remains driven by payout ratios, which means the earnings cycle is important, and this year will clearly therefore be tougher,” Tsang said.

Steen Jakobsen, chief investment officer at Saxo Bank, said there would be pressure to the “downside” in terms of dividend payouts as more companies issue weaker guidance and rethink whether their cash flow can support dividends.

“A number of people who live off this dividend-yield model will be coming up short,” Jakobsen said.

At the same time, regulators concerned about making sure that enough capital is available to support the real economy are pushing back against banks and insurance companies continuing payouts.

HSBC and Standard Chartered suspended their dividends and buy backs on April 1 after a request from the Prudential Regulation Authority, an arm of the Bank of England. More than a dozen banks, including BNP Paribas, Credit Suisse, ING and UBS, have done the same at the request of regulators.

Jamie Dimon, the JPMorgan CEO, warned in his annual letters to shareholders last week that the American banking giant may have to suspend its dividend if it faces “extremely adverse” operating conditions. JPMorgan is one of eight big American lenders that have already suspended their buy-backs until July as a result of the economic fallout.

In an interview with The Financial Times last week, AXA chief executive Thomas Buberl criticised confusion in Europe on whether insurers should pay out dividends as Europe’s central regulators called on insurers not to pay dividends, but national regulators took opposing stances.

David Webb, an activist investor who has long criticised family-run Hong Kong companies for sitting on too much cash, said the PRA overstepped in ordering HSBC and Standard Chartered to suspend their dividends, but said the bank’s directors were within their rights to do so.

“I think it’s a gross interference,” Webb said. “[The PRA said] we think you would have more than sufficient capital even if you did pay this dividend, but we don’t want you to. You can’t have it both ways.”

The Hong Kong Monetary Authority has said it does not believe the city’s banks need to suspend their dividends as the sector has enough capital available to continue lending to the economy.

Retail investors who have come to rely on the dividend to supplement their income are appealing to local regulators to intervene on their behalf.

A 76-year-old woman who gave her surname as Lai at a shareholder rally on April 8, said she would have been entitled to a cash payout of HK$16,380 (US$2,113) if HSBC had not cancelled its final interim dividend. The final interim dividend of US$0.21 a share was set to be paid on Tuesday.

“I have no job and my husband has died. I need the HSBC dividend to support my living,” said Lai, whose husband died two years ago. “Without the income, I do not know how to survive.”

Additional reporting by Enoch Yiu