Companies & Banks: Be careful with Paying Out Your Dividends
Over the past several weeks, I have recorded small presentations and posted some blogs and articles, where I have advised companies to maintain their liquidity over this period as much as they can. I have also emphasised the importance for financial institutions as well as publicly traded companies not to pay out their dividends. In Europe, we see more and more financial institutions and companies that have decided to halt paying out dividends, whereas those in the United States maintain their original course of actions. I wonder why.
America’s biggest banks have so far staunchly defended their plans to continue paying out dividends. In his annual letter to shareholders, Mr Dimon said JPMorgan was “not immune” to the coronavirus crisis and is exposing itself to “billions of dollars of additional credit losses” as it lends to businesses and individuals in need. According to some analysts, dividend cuts would send a bad signal to shareholders, making owning shares less attractive while hurting investors who rely on a steady income from stocks, such as pension funds. However, according to the futures market, dividends paid by big US companies will take nine years to recover from the downturn — the biggest hit to corporate payouts since the second world war.
In Europe, we see that majority of the banks have received over the past week or two a letter from their Central Bank advising/requesting them not to pay out the dividends. Rolls-Royce, the UK aero-engines maker has also suspended its payment for the first time since privatisation in 1987. Rolls-Royce will not be the only one.
Just as in the financial crisis, banks run the risk of appearing distanced in their response to the Covid-19 and to the needs of markets, if they do not address issues such as bonuses and communicate clearly over dividends. We also know that should a company or possibly a financial institution need any governmental help, funding or bailout, the government will review activities of the entities (their boards) as to preserving their viability and liquidity. However, it might very well be that the reason why we see two different approaches is that European companies and institutions rely more on their national governments and EU institutions than their counter-parties in the United States.
The development will undoubtedly be interesting - are investors or governments more reliable?