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US dividends are down, but they are vastly better than expected

[NEW YORK] It's been a horrendous year for so many things: public health, employment, civil discourse, political norms, cultural and sports events, restaurants, small businesses of nearly every sort. Make your own list. There are plenty of choices.

In the stock market, dividend payouts had appeared to be among the prime casualties of the recession caused by the coronavirus pandemic. With the economy in a steep dive earlier this year, big corporations began hoarding cash. There were predictions by Goldman Sachs, among others, that dividends would fall by more than 20 per cent, cutting payouts to investors by hundreds of millions of dollars.

Well, it hasn't turned out that way. Dividends are down, yes, after years of steady and substantial gains.

But with little more than a month to go in 2020, the total decline for dividends in the benchmark S&P 500 stock index is likely to have amounted to less than 1 per cent to 0.67 per cent, more precisely. That's the estimate of Howard Silverblatt, senior index analyst for S&P Dow Jones Indices, who has been tracking these numbers closely for decades.

A drop in that range would be inconsequential, given the severity of the stock market downturn earlier in the year and the rate that the economy shrank, 31.4 per cent, in the second quarter of the year.

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"Considering where we were, this hasn't been a bad year for dividends," Mr Silverblatt said in an interview. "It has been a great year." What accounts for the turnaround?

In a word, Mr Silverblatt said: "Liquidity." Corporations have been inundated with a flood of cash. Enormous monetary and fiscal stimulus programmes have helped keep big businesses afloat and allowed many of them to maintain their dividend payouts, which are prized by many income-seeking investors.

Interest rates are extraordinarily low and likely to remain so for years to come, central bankers say. That's hurting people who count on bond income to pay for their retirement. But the low rates have helped keep dividend payments coming. American corporations are taking advantage of the low rates by selling bonds at a frenetic pace: more than US$1.6 billion this year, according to the data provider Dealogic. Some of that cash has reached investors in the form of dividends.

Still, the business backdrop remains unsettled. Corporate earnings, which fell a calamitous 35.1 per cent in the second quarter, are still depressed, with a further drop of 8.7 per cent through Nov 17, according to Yardeni Research.

When the coronavirus first surged in the United States, companies in many of the most heavily hit business sectors found themselves in a severe cash crunch. For the three months that ended on March 31, S&P 500 companies actually paid out more money in dividends than they earned: 130 per cent of reported earnings, S&P data shows.

But the business outlook for many companies has since turned around, and their dividend actions reflect it. Darden Restaurants, Estée Lauder and Marathon Oil suspended their dividend payments earlier this year, only to reinstate them recently. These moves have helped to improve the overall picture for dividends.

Enormous increases in dividend payouts by a handful of companies have also bolstered the overall total. The two biggest increases on Mr Silverblatt's list come from two reliable giants. Microsoft increased its dividend by 9.8 per cent in September, which amounts to a boost of US$1.5 billion. Apple in April increased its dividend by US$875 million. Both companies have been flush with cash and able to generate hefty profits and dividend payouts, even in a pandemic.

The next two big dividend increases came from members of the S&P Dividend Aristocrats index - a group of companies that have increased dividends annually for at least 25 consecutive years. AbbVie, the drug company, raised its dividends by US$847 million in October. And Chevron, the oil company, did so by US$756 million in January - before the economy and oil prices plunged. It has maintained quarterly dividends since then, despite declining oil prices, in deference to the presumed desires of the investors who have been counting on that income stream.

Whether Chevron - and a host of other companies - will manage to stave off dividend cuts early next year will depend on the state of the economy, which is likely to depend on the state of the pandemic. Big dividend-paying drug companies like Pfizer and Johnson & Johnson are working on coronavirus vaccines that could help turn the health crisis around.

Many of the biggest and fastest-growing companies don't pay dividends, of course. These include the so-called FANG stocks - Facebook, Amazon, Netflix and Google (Alphabet) - as well as Tesla, which will soon be entering the S&P 500. These stocks have performed fabulously without them, demonstrating that total return - a combination of the change in share price, plus dividends - can be wonderful without any dividends at all.

Where are dividends heading? It's easy to project forward and assume that the economy is stabilising and corporate payouts can be sustained. But projections like that sometimes go terribly awry.

As things stand now, Mr Silverblatt says, it's reasonable to project that corporate America will prosper and that dividend payments will continue to recover, perhaps even hitting a record next year, exceeding their 2019 peak.

But after decades tracking the ebb and flow of the corporate economy, he is cautious. "We don't know whether we'll be in another crisis next year, or what that might do to dividends," he said. The coronavirus is surging and the economy is still vulnerable.


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