Whether local or national, further lockdowns will come with harmful economic consequences, not least for sectors of the economy reliant on customer footfall. This week’s big share price fallers reflect this, with travel and leisure particularly well represented in the list of pain. Many of them had bounced back from Covid-19-induced lows on the optimistic basis that the pandemic may prove short-lived. The painful reality that the virus lingers and a vaccine is, at best, months away is now biting.
Indeed, a further shutdown of hospitality and leisure venues will – alongside the investments they had made in ensuring they can be opened safely – only put further pressure on their squeezed cash flows. While this is likely to disproportionately affect smaller operators, even large companies are not immune – take Cineworld, for example, which last week closed its doors to cinema-goers as movie studios announced further delays to key releases.
To blame Covid-19 for all its travails would not, of course, be entirely accurate. The cinema operator had gambled big on a debt-fuelled acquisition, arguably stretching its finances to the point where any trading hiccup, let alone one of the magnitude of the pandemic, would have spelled trouble. And Cineworld is not alone – in the calm before the coronavirus storm, companies around the world had taken full advantage of attractive borrowing rates to fund similar acquisition sprees, or – more cynically – to protect their share prices by buying back shares and maintaining dividends, in the process taking aggregate corporate debt to record levels. That would suggest there may be many more powder kegs out there for which Covid-19 could prove the spark, especially as its economic consequences do not look likely to dissipate as quickly as many had hoped, and the effects are likely to ripple.
Over-indebtedness has also been a major factor in the dividend cuts we have seen many companies make throughout the pandemic – in the pecking order, servicing debt to stay alive will always trump paying shareholders to keep them sweet. And as we explore in this week’s cover feature, even those companies whose dividends have largely survived the carnage face a noxious brew of challenges that mean their dividends may not be as safe as once assumed. Income investing may never be the same again.
