Dividend Massacre In This Crisis Is Already Breaking Records, And It's Only Just Starting

Submitted by Wolf Richter of Wolf Street

Dividend yield can be an irresistible siren song in the era of central-bank interest-rate and bond-yield repression: Harley Davidson’s dividend yield was over 7% until this morning – when it announced that it would slash its dividend by 95%, from 38 cents to a symbolic 2 cents to conserve cash. Going forward, the dividend yield will be close to 0%.

GM, whose dividend yield was an alluring 6.5%, announced yesterday that it would eliminate its dividend altogether to save about $2 billion in cash; and going forward, its dividend yield will be 0%. Ford had a dividend yield of over 11% before it eliminated its dividend.

Mortgage REITS have reduced or eliminated their rich dividends – and dividends is the primary reason to hold REITs. This started in late March, when AG Mortgage Investment Trust announced that it would stop paying dividends. Investco Mortgage Capital and TPG RE Finance Trust both said they would “delay” paying their previously announced dividends to preserve liquidity. In April, AGNC announced that it would reduce its dividend by 25%.

All of them had theoretical dividend yields well into the double-digits. Investco’s theoretical dividend yield – which reflects the past annual dividend payments as a percent of current share price – is over 60%.

Mall REITs are under enormous pressure, with most of their tenants shut down and many of them not paying rent. For example, Macerich announced mid-March that it would reduce its dividend from 75 cents a share to 50 cents, of which it would pay only 20% in cash and the remaining 80% in stock.

The list of big names is getting longer by the day: Boeing, the airlines, the automakers, the cruise lines, cosmetics company Estee Lauder, hospital firm HCA Healthcare, hotel chains such as Hilton Worldwide and Marriott, casino operator Las Vegas Sands, retailers of all kinds including TJX, Kohl’s, and Macy’s….

This has been a persistent drumbeat over the past few weeks: Companies are struggling to preserve cash in order to survive this crisis, and dividends vanish with an announcement that the Board of Directors has decided to make them vanish.

Through Monday morning, 81 US companies and publicly traded investment funds, such as REITs and business development companies (BDCs), have announced that they would suspended or cancel their dividends, according to S&P Global Market Intelligence, cited by the Wall Street Journal.

It has only been a little over one month when this dance started, but those 81 suspensions or cancellations are already by far higher than the announcements of dividend suspensions and cancellations in any full calendar year going back to the beginning of the data in 2001. The prior record calendar year was 2009 with 63 announcements of dividends getting suspended or canceled.

Those 81 announcements so far are already higher than the combined total of the 10 years since 2010 (55).

And it doesn’t include those that will announce dividend cuts, including Oxford Square Capital [OXSQ], a publicly-traded BDC, which announced today that its dividend (or rather “distribution”) will mostly or totally vanish when it said “that no reliance should be placed on the prospect for any particular level of distribution for those months, or for any other periods.” Upon which its shares plunged 20%.

And 135 companies have announced in 2020 through Monday morning that they would reduce their dividends. This does not include companies like Harley Davidson that have chimed in since Monday morning. Those 135 announcements of dividend reductions so far this year is already the fourth highest number of any full calendar year in the data since 2001.

The number two and three calendar years for dividend reductions were 2015 (138) and 2008 (137). The year 2020 will take out those two in a couple of days, which will make 2020 the second highest year on record.

The number one calendar year on record for the highest number of dividend reductions was in 2009, with 316 such announcements. But 2020 is still young, and the crisis has just begun.

All dividend actions so far this year through Monday amount to a cut in payouts of about $22.8 billion, according to S&P Dow Jones Indices, cited by the Wall Street Journal.

Dividends look very attractive to income investors until the dividends disappear. That dreaded press release is all it takes. And income investors wonder where is there to go as the Fed systematically represses and destroys income from other sources such as investment grade bonds, government bonds, and savings products.

Well, for those investors, there are dividend stocks that still haven’t issued that infamous press release yet, such as energy giants Exxon and Chevron, which are caught up in the global collapse of the crude oil market, powered by the global collapse of demand for crude oil. Both have already announced large-scale cuts to their capital expenditure programs. Given the plunge in their shares, dividend yield has taken on juicy proportion: Exxon’s dividend yield is 7.8% and Chevron’s is 5.7%.

Will they, like the others that once had a juicy dividend yield, eliminate their dividends to preserve cash to get through this crisis?

That’s a thorny question, given the dividend massacre that has already happened so far this year. Chevron shares are down 26% year-to-date, despite the huge rally since March 23; Exxon shares are down 37% year-to-date. These share price declines show that investors have serious doubts about the dividends. And it shows how the old saw that dividend stocks are good for bear markets is actually a high-risk gamble.