Costco’s special dividend last year helped buoy the U.S. tally of quarterly distributions in a year where the pandemic led to many cuts and suspensions. Here, a Costco in Novato, Calif., during Covid restrictions last spring.
Justin Sullivan/Getty Images
After a difficult 2020 for dividends globally, there are reasons for cautious optimism this year, with the possibility of a 5% overall increase in payouts, helped by more special dividends.
That’s a key takeaway from Janus Henderson Investors’ latest quarterly dividend report.
“Just as in any normal recession, dividends are falling less than profits because they reflect assumptions about a firm’s prospects rather than short-term profit,” the report observes. “This is one reason why income is such an important consideration for investors.”
Last year was one to forget for global dividends, which dropped 12% from 2019 levels in dollar terms as many companies cut or suspended their payouts amid the uncertainty wrought by the pandemic.
The U.S., however, was a relative haven. Domestic dividend payments climbed 2.4% year over year to a record high of $503 billion, helped by special dividends—including a large one paid out late last year by Costco Wholesale (ticker: COST). In a release announcing the special last December, the retailer of bulk food and goods said the $10-a-share special payout would cost about $4.4 billion.
Weathering the Storm
The pandemic caused many companies to cut or suspend their dividends, but U.S. companies held up relatively well last year.
Note: Data are in U.S. dollars
Source: Janus Henderson Investors
“Certainly, versus a lot of the world, North America was a standout, and the U.S. did quite well,” Matt Peron, director of research at Janus Henderson Advisors, tells Barron’s.
The asset manager bases its dividend survey on the 1,200 largest global companies by market capitalization going into the start of the survey year.
The latest dividend report shows that 14% of the North American companies, mainly in the U.S., included in its survey cut or canceled their dividends from the second through the fourth quarters of 2020—not good, but still a relatively low level compared with other regions.
In the United Kingdom, 55% of companies included in the survey cut or canceled their dividends. That figure was 50% in both Europe and emerging markets, 37% in Japan, and 44% in the Asia-Pacific region.
A key reason for the U.S. dividend strength, Peron said, is that big American companies “can have significant buyback programs so they went first to curtail their buybacks before they went into cutting dividends, which protected the dividends a bit more.”
S&P 500 index stock buybacks dropped by about 30% last year versus 2019 levels.
The large U.S. banks, for example, suspended their buyback programs early in the pandemic last March but in most cases have continued to pay their dividends and even increase them. Late last year, the Federal Reserve authorized the large banks to resume buybacks with limits.
European companies, in contrast, tend to return more capital via dividends than buybacks, leaving them with fewer options when it came to preserving capital. In addition, many European and U.K. financial firms, and banks in particular, were forced by regulators to suspend their dividends last year as the pandemic ratcheted up.
Some of those banks are starting to resume their dividends. HSBC Holdings (HSBA.UK), which previously canceled its dividend, said on Tuesday that it would pay an interim dividend for 2020 of 15 cents per ordinary share.
Income Investing
Recent columns and coverage on dividends and the hunt for yield
Besides banking, other hard-hit sectors for dividends included oil, mining, and consumer discretionary.
Another sign of the strength of U.S. dividends is that the eight of the 10 largest global corporate payers last year were based in the U.S., led by Microsoft (MSFT) and followed by AT&T (T), Exxon Mobil (XOM), Apple (AAPL), and JPMorgan Chase (JPM).
In 2019, however, only half of the top 10 global dividend payers were based in the U.S.
Peron attributes the preponderance of U.S. companies among the top 10 payers last year in part to the durability of many firms during the pandemic. But he adds that “the technology companies, as they’ve matured, [have] dividends that are getting very hefty.”
That includes Microsoft and Apple. Even though their yields are pretty low at 1% and 0.7%, respectively, what they pay out in absolute dollars is huge.
During its previous fiscal year, which ended last September, Apple’s common stock dividends totaled about $14 billion. Microsoft, whose previous fiscal year ended this past June, paid out about $15 billion in common dividends.
Still, dividends in many countries came under a lot of pressure due to Covid-19, thanks to big exposures to banking and other hard-hit sectors. In U.S. dollars and including special dividends and other adjustments, emerging markets dividends dropped 9.5% year over year. Europe, excluding the U.K., was down nearly 32%. The U.K. plunged 41%. Japan was down 5.6%, and the Asia-Pacific region fell 18.3%.
Total global dividends paid out last year came in at nearly $1.3 trillion. In the fourth quarter, the total was $269.4 billion, down 9.4% year over year.
Peron maintains that equity income strategies still make sense, the wave of dividend cuts and suspensions during the heights of the pandemic notwithstanding.
Such U.S.-focused strategies were out of favor last year partly because “value underperformed and dividend payers underperformed during the heart of the pandemic,” he says. “Despite the fact that there were few [dividend] cuts, you saw the strategies lag on a total-return basis. In the U.S., the prospects are better because people will see that the U.S. was quite resilient in a very, very severely stressed environment.”
Looking ahead, Janus Henderson points out in the report that “the outlook for the full year remains extremely uncertain,” though there are some encouraging signs that dividends are stabilizing and reviving their growth globally.
The firm’s worst-case scenario sees global dividends falling by 2% in dollar terms this year, considerably better than the 12% drop in 2020. But those dividends could grow by as much as 5%. It also sees the potential for more special dividends as companies use “strong cash positions to make up some of the decline in distributions in 2020.”
That would be a nice bonus for equity income investors.
Write to Lawrence C. Strauss at [email protected]
