A dividend is a return of company earnings paid directly to shareholders. It is a form of profit sharing and something that investors have come to rely on when looking for cash flow as well as long-term capital growth.
Here's how this process works:
Given the current economic challenges due to the pandemic virus, dividends will certainly be in the headlines as companies readjust their perspective on their long-term profitability. If economic growth is significantly slower and company profits fall, it is reasonable to assume dividends will be under pressure. This is our assumption.
DWM Research Process
It is critical to assess the likelihood that a company will continue to pay its dividend based on its business prospects. At DWM we consistently review companies to determine how sustainable the dividend likely will be in a variety economic scenarios. This would include dramatic economic downturns such as the one occurring right now.
Dividends are reliant on current business prospects, macro conditions, a company’s stated declarations as to their dividend payout expectations, and balance sheet strength. DWM analysis occurs before we invest in any asset and remains an ongoing review point as we hold a position.
The areas that I expect to have the most difficulty continuing dividend payments include the following sectors:
- Travel related companies
These sectors will be particularly impacted by the current economic crisis. It would not surprise me to see these companies begin to address dividend payouts in earnings calls. These sectors may be impacted beyond the short-term as there will likely be a tremendous shift in consumer behavior.
Importantly, one also must recognize that certain situations may occur where dividends are affected on a shorter-term basis within other sectors. That occurred during the financial crisis when a number of companies cut their dividends on a temporary basis. We expect that may be the case for some companies given the impact of the pandemic on GDP growth.
For most companies, we believe this will be short-term. We believe other sectors will be more insulated long-term and we have confidence that many of these companies will maintain their long-term dividend payout strategy. They may suspend dividends temporarily, but I do not believe this to be a lasting condition.
DWM Consistent Review
We are confident analysis process in place at DWM has provided insulation for portfolios relative to dividend payout adjustments. Not relying on sectors that will likely be long-term impacted by the virus pandemic is turning out to be a wise decision.
Of course, we will continue to monitor conditions. In a highly volatile environment where economic data can dramatically change, consistent review and analysis is necessary. You can be assured the DWM will be watching and assessing on a real-time basis.