Fittingly, the Hong Kong and Shanghai Banking Corporation, a champion of globalism, has become emblematic for capitalism’s identity crisis. Reports that senior figures at HSBC (HSBA) are once again debating a switch in domicile to Hong Kong come on the back of the UK regulator brow-beating banks against paying dividends.
Arguably, income was the only reason to hold bank shares, and for lenders rescued in 2008, dividends had hardly been reinstated. Thanks to its globally diversified revenues, HSBC didn’t need to go cap in hand to the government and now that Britain’s banks are being coerced to put society before shareholders, the biggest by market capitalisation might make good on its slogan: “We are not an island”.
Companies continue to show fierce commitment to paying shareholders, especially those where core operations can reasonably be labelled ex-growth. Oil giant Royal Dutch Shell (RDSB) has suspended its share buyback programme and cut capital expenditure, but is drawing down short-term loan facilities. It recently announced an additional $12bn (£9.8bn) credit line, taking its cash liquidity to $40bn, to support the dividend.
Close peer BP (BP.) offers a yield of 10 per cent on the current share price, implying less than steadfast confidence that investors are buying into the net zero carbon future new CEO Bernard Looney envisaged so publicly. Faced with uncertainty, shareholders want jam today.
Unsure when the coronavirus disruption will settle down, bond investors are also demanding more, evidenced by a wider spread between the yields on corporate and quality government debt. More expensive term finance combined with the payment holidays being offered to consumers, who have had their lives and livelihoods put on hold in lockdown, diminishes cash flows for wholesale energy providers. Already, the anticipation of a deteriorating working capital position has seen Centrica (CNA) cancel its dividend.
Figures released by Peel Hunt record that over half of utilities companies in the FTSE 350 and Aim 100 are protecting payouts. That’s more than in any other sector. Yet there are issues investors should consider for even these stalwarts. What about when consumer payment holidays drain working capital? What about interest payments or maintenance capital expenditure? What about DB pension schemes?
Across sectors, Peel Hunt reports cancelled dividends amount to £15.5bn, compared with £8.5bn that have been maintained. Unsurprisingly, travel & leisure, transport and media businesses fall into the former category.
All companies face a terrible dilemma, however. The worst crisis for growth in the real economy since the Great Depression is leaving shareholders with little to cheer. Paying them an income can maintain the faith and prevent a rout of the share price. The challenge is always about striking the balance between maintaining shareholder benefits, operations and investing in future growth. Investors with long-term horizons should pay heed to choices directors make now.
See below for our entire FTSE350 review:
FTSE350 profitability: the direction is clear but not the severity
FTSE350 Review: Coronavirus and the dividend dilemma
FTSE350 groups scramble for cash
Aerospace on the descent as defence stays on course
Construction hits the brakes once again
Coronavirus threatens electronics and technology
Engineering and industrials braced for a downturn
Few guarantees for financial services
Coronavirus slams high street doors shut
Insurers stuck between policies and politics
Miners hold on to their hats in Covid rout
Supermarkets thrive but coronavirus harms other personal goods
Oil companies suffer Covid-19 crunch
Pharma giants entering the testing fray
Property income prospects dimmed by Covid-19
Subscription-based models make for sturdy businesses
Downturn threat obscures outlook for outsourcers
Are telcos still a defensive play?