- Sixty-five JSE-listed companies suspended dividends this year, and this number may grow.
- This will impact investment growth from share investments, including from unit trusts and pension funds.
- Pensioners, people close to retirement and corporate executives may face the biggest impact from dividend suspensions.
- For more articles, go to www.BusinessInsider.co.za.
Shellshocked South Africans face an extra hit from the coronavirus crisis after JSE-listed companies decided to halt more than R100 billion in dividends so far in 2020.
A dividend is part of a company’s profit that is paid out to shareholders – if you are invested in a unit trust, retirement annuity or pension fund that is invested in shares, dividends are key to your savings.
An Allan Gray study covering the period from 1960 to 2009 showed that dividends made up more than half of the total real return from shares listed on the JSE over those 49 years.
Investors expect that the scale of dividend suspensions will increase as more companies report their results and review whether they should still be making pay-outs.
Analysis by Business Insider South Africa shows that at least 65 JSE-listed companies suspended dividends this year.
The biggest companies that suspended their dividends include Glencore, Capitec, Investec, Redefine Properties, Rand Merchant Bank, and Sasol.
Last year, Glencore paid total dividends of $2.71 billion (R46.1 billion), while Investec distributed around R6 billion in total dividends. Redefine paid dividends of R5.5 billion in the year ending August 2019. Sasol made distributions of R4 billion in its 2019 year.
A few years back, property stocks were a favourite among JSE investors due to their solid payouts, but this sector has turned sour, and twelve of the companies that halted distributions this year are property shares.
Eight industrial companies, seven banks and financial services companies and five retailers put a hold on their dividends.
Even the most reliable dividend-paying companies announced suspensions. An example of this is empowerment company Brimstone Investment Corporation, which suspended its dividend for the first time in 17 years in March.
The reason why a specific company suspends its dividend is key, says Warren Ingram, Galileo Capital executive director. “If a company is suspending its dividend for six months to a year and for a good reason, then that is fine. A good reason would be where the company’s decision will give you significant capital growth in the future.”
Right now the need for survival, including avoiding running into financial difficulty, trumps dividend pay-outs for many companies. A few companies justified their dividend halts for reasons other than the Covid crisis.
Telkom suspended its dividend for three years due to its expansion plans. RMB withheld its dividend due to its restructuring.
Capitec Bank partly attributed its dividend suspension to the South African Reserve Bank’s call for banks to halt dividends and executive bonuses during the coronavirus crisis.
Who will hurt most from the dividend halt?
Among those hardest hit from the dividend suspension will be people in retirement who draw an income from investments with a significant exposure to shares. Marius Pretorius, Old Mutual head of marketing for retail saving, says these retirees may need to reduce their monthly withdrawals from their funds to ensure that their retirement plans remain on track.
Those close to retirement may also be affected. Pretorius says that these people should have moved the bulk of their investments into cautious investments with less exposure to equities and protect their funds against shocks like Covid-19.
“Since they don’t have much time until retirement, they might have to increase their monthly premiums if the returns are less than what their plan requires. This could be tricky if formal employment is their only source of revenue with retirement fast approaching,” Pretorius says.
Apart from retirees who are dependent on dividends for income, and those close to retirement, corporate executives, who receive shares as payment, will also be affected, says Kim Frost, partner and financial advisor at Bespoke Financial Services. Investors who put their money into unit trusts that specialised in high dividend-yielding companies will also take a hard knock, Frost adds.
Pretorius says that investors might fall behind with their financial plans in the short term due to the dividend suspensions and a Covid-related fall in share prices. But in the long run, their portfolios should rebound once the crisis has passed, he adds.
Pretorius says: “One should not make rash decisions based on one year only. People must stay invested in their portfolios despite companies not paying dividends.”
Duggan Matthews, Marriot Asset Management chief investment officer, says that it also was critical for investors to have offshore exposure as foreign companies were proving more resilient when it came to paying dividends than South African companies.
When will dividends return?
Matthews told Business Insider that depending on how the pandemic unfolded he was hoping that these companies might reinstate their dividends within 12 to 24 months.
“When there’s a bit more certainty many companies will reinstate dividends pretty close to the level that we saw pre-Covid,” Matthews says.
But given that South Africa’s number of daily new Covid cases are still growing, and amid fears the government will reimpose harsh lockdown measures, certainty is in low supply.
Matthews says that the Covid event is without precedent, and will probably end when scientists developed a vaccine.