Dividends and Buybacks: To Suspend or Not to Suspend

• By Addison Holmes, Director, Nasdaq Corporate Services Strategic Capital Intelligence team

Capital Deployment in the Time of COVID-19

Several months ago, Nasdaq Corporate Services’ Strategic Capital Intelligence team published a thought leadership piece called Anticipating Investor Reactions to Capital Allocation Decisions. The team leveraged unique data and analytics, parsing transcripts and surfacing buy-side insights to assess the capital allocation landscape. Now, in a time of extreme market volatility, it is crucial for corporates to consider assessing the sustainability of their capital allocation policies and understanding how changes to these policies might be interpreted by the market.

The 11 year bull market came to a close in March 2020, with the declaration of a global pandemic by the World Health Organization. As countries closed their borders and states locked down, companies faced massive uncertainty about their future. This led to companies withdrawing guidance and suspending their capital deployment activities.

Nasdaq Corporate Services Strategic Capital Intelligence team’s key takeaways from its analysis in this article are outlined below:

• Consumer Discretionary companies currently lead dividend and buyback suspensions.
• Suspensions are largely driven by companies with a market cap of less than $8 Billion.
• Inability to sustain dividends and buybacks is correlated to leverage profile.
• Messaging around the length of dividend and buyback suspensions has been vague.
• Commitment to capital allocation policy is one factor affecting performance.
• Nasdaq Corporate Services’ Strategic Capital Intelligence team is well positioned to help companies navigate changes to their capital allocation policies amidst continued market uncertainty.

Consumer Discretionary Companies Lead Suspensions 

From beginning of March 2020 to May 5, 2020, roughly 84 S&P 1500 companies have suspended their dividend and 98 have suspended their buyback program. This comes to a total of 170 S&P 1500 companies have altered their capital allocation policies. A majority of S&P 1500 companies suspending dividends are in the consumer discretionary sector. Companies in the Consumer Discretionary and Financials sectors led buyback suspensions, based on public announcements (Fig.1 ).

Suspensions Are Largely Driven by Smaller Companies  

Of the S&P 1500 companies suspending their dividends, 72% have a market cap of less than $8 Billion. Roughly 46% have a market cap of less than $2 Billion. This may indicate that it is smaller companies that struggle most with the sustainability of dividends in this time of market volatility (Fig. 2).

Suspensions Are Correlated to Leverage Profile 

A majority all S&P 1500 companies suspending their dividend and/or buyback policies are relatively over-levered. This may indicate that leverage profile impacts the ability of companies to return capital to their shareholders, either through dividends or buying back shares (Fig. 3).

Messaging Around These Suspensions Was Vague

88% of S&P 1500 companies that suspended dividends and/or buybacks used vague language, implying and indefinite length of suspension. 6% used specific language to indicate that the suspension is temporary. Another 3% suspended dividends and buybacks only for Q1 (Fig. 4).

Suspensions of Payout Are Correlated with Poor YTD Performance and Downward Analyst Revisions

Suspensions of dividends and buybacks are correlated with downward revisions of EPS and Cash Flow per Share (CFPS) estimates over the period beginning January 1, 2020 and ending May 5, 2020. As such, analysts may be less optimistic about a company’s earnings and cash flow prospects after learning that a company’s management does not believe its current dividend policy is sustainable through a time of economic hardship.

In looking at those companies that suspended dividends, our team observed that the median EPS revision is -55% and the median CFPS revision is -29%. The corresponding median price change for these companies the period beginning January 1, 2020 and ending May 5, 2020 is -52%. For companies that suspended their buyback programs, the median EPS revision is -26% and the median CFPS revision is -22%. The median price change for these companies over the period is -29%. This information is visualized in Figure 5.

Our team’s analysis indicates that market and analyst sentiment is more impacted by the suspension of a dividend than the suspension of a buyback. While a buyback is a singular event, dividend policy represents a continued commitment to distribute wealth to shareholders. Suspension of a dividend, then, provides more information about the long term prospects of a company than suspension of a buyback.

Real Estate, Energy, and Financials sector companies experienced the most negative downward revisions of EPS and CFPS estimates as well as the most severe YTD price change. Relative underperformance of these sectors should be considered as confounding factors in this analysis (Fig. 6).

Alternatively, Information Technology, Industrials, and Consumer Staples companies experienced the least negative downward estimate revisions.

Commitment to Capital Allocation Policy Impacts Performance

To analyze the relative impact of dividend and buyback suspension on performance, Nasdaq Corporate Services’ Strategic Capital Intelligence team compared the price movements of the S&P 500 High Yield Dividend Index (high dividend payers) with the S&P High Yield Dividend Aristocrats Index (dividend growers).  As of May 5, 2020, no constituents of the S&P Dividend Aristocrats Index have suspended their dividend. The S&P High Dividend Index, on the other hand, had nearly a quarter of its constituents suspend or decrease their dividend. The corresponding performance of each index YTD is highlighted below. Relative to the S&P Dividend Aristocrats Index, the S&P High Dividend Index has underperformed in 2020 (Fig.7). The implication is that the market rewards unwavering commitment to capital allocation policy.

Conclusions

Now, more than ever, it is crucial to understand the impact capital allocation policy has on market sentiment.  Since the beginning of March 2020, Consumer Discretionary companies have lead suspensions in dividends and buybacks, with smaller companies making up the majority of those companies seemingly unable to sustain their payout. In addition to market cap, leverage is a driving factor in companies’ decisions to suspend dividends and buybacks. Likely due to continued uncertainty about the pandemic and corresponding market conditions messaging around the length of dividend and buyback suspensions has been vague. That said, commitment to capital allocation policy is a factor impacting year-to-date performance.

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In these uncertain times, Nasdaq Corporate Services’ Strategic Capital Intelligence team is consulting with issuers and helping them in their decisions regarding their dividend and buyback policies. The team delivers investor perspectives and capital markets implications through analysis of data, benchmarks, case studies and scenarios. The team works with clients across sector, market-cap and financial profile to model out the continued sustainability of dividends, buybacks and stock splits. As part of a typical engagement, the team helps issuers identify risks within their current shareholder base that may arise as a result of changes to their capital allocation policy. Nasdaq Corporate Services’ Strategic Capital Intelligence team can also perform an investor perception study in parallel for additional insight to expectations and potential market reactions. The team is also supporting issuers post implementation of their capital allocation policy, assisting in developing investor engagement strategies for the virtual environment and crafting impactful messaging.

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About the Author:

Addison Holmes is the Head of the Western Region for the Strategic Capital Intelligence team at Nasdaq. In this role, Addison covers the West Coast client accounts, communicates thought leadership, and is building out the West Coast team. She partners with clients across multiple sectors, advising clients ranging from 10M to 200B market cap and specializing in identifying high potential generalist capital in additional to sector-focused capital.  Before stepping into this role, Addison was a senior analyst on the team. Prior to joining Nasdaq in 2018, Addison worked in the field of business analytics within the accounting industry. Addison is a Certified Public Accountant and is pursuing her Chartered Financial Analyst designation. 

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