The massive fiscal stimulus may have some strings attached
Covid-19 has provoked central banks to pump huge amounts of liquidity into markets, far in excess of the 2008 financial crisis.
In some cases this money comes with restrictions, in particular on dividend payments.
|Jurisdiction||Restrictions on Dividend Payments|
|United States||No restrictions|
|Europe||No dividends paid until October 1st, 2020 (strongly recommended)|
|United Kingdom||No dividend increases by banks (regulator expectation)
No dividends paid by companies receiving loans through the new COVID-19 loan scheme
|South Korea||No restrictions|
|Brazil||No dividends paid by banks until September, 2020 or later|
Congress has passed about $2.8 trillion dollars in relief packages, most in the CARES act (direct cash payments, unemployment benefits, government lending to companies and further loans and grants).
The US Federal Reserve has reduced the benchmark interest rate by a total of 1.5% - the biggest cut since the great recession - to an historically low range of 0 - 0.25%.
Additionally the Fed has restarted quantitative easing (buying US Treasuries and mortgage backed securities), expanded its repo operations (short term loans to banks) and relaunched it’s Primary Dealer Credit Facility (essentially loans to big commercial banks).
Many US companies are shoring up their balance sheets by drawing-down their credit facilities and withdrawing deposits from money market funds. The Fed is counteracting this run on the banks by establishing the Money Market Mutual Fund Liquidity Facility which is also providing loans to these money market funds.
As with the global financial crisis there are no restrictions placed on these loans, meaning companies are free to distribute to shareholders through dividends. The Fed’s more laissez-faire attitude demonstrates their intention not to penalize companies which are not at fault for the recession.
The Bank of Canada has also reduced the benchmark interest rate by 1.5% to 0.25%, expanded it’s repo operations, initiated a quantitative easing program, lowered reserve requirements for loans, extended the Standing Liquidity Facility and created the Standing Term Liquidity Facility (bank loan programs).
There are also no restrictions on dividend payments in Canada.
The ECB has no scope to lower interest rates however it has eased lending requirements on the bank loan scheme (TLTRO III) and announced another lending program called PELTRO (Pandemic Emergency Longer-Term Refinancing Operations).
Additionally the ECB has extended its bond-buying program, announced the Pandemic Emergency Purchase Program (an asset purchase program) and lowered the reserve ratio requirements allowing banks to loan more.
The ECB has issued a recommendation in very strong language that no companies should pay dividends for fiscal 2019 and 2020. Further, no dividends are to be paid prior to 1st October 2020.
The Bank of England has cut interest rates from 0.75% to 0.10% and is issuing new long-term loans to banks (with a 4 year term).
The Prudential Regulation Authority (PRA - part of the BoE) has issued a supervisory expectation that there is to be no increases to dividends for the duration of these loans.
The Covid Corporate Financing Facility has been established to provide loans directly to large UK companies. The terms of these loans impose restrictions on dividend payments until May 2021.
The benchmark interest rate has been cut to 0.25% and a $25bn credit facility has been established for banks. A further $4bn in loans for SMEs at a rate of 0.25% has been established.
The Bank of Korea is additionally buying securities on the open market. No restrictions on dividend payments have been imposed.
The Bank of Japan is purchasing government bonds and buying securities on the open market (ETFs and REITs).
The bank has established a $132bn loan scheme and facilitating corporate financing. There is no restriction or recommendations on dividend payments.
The benchmark interest rate has been lowered from 4.25% to 3% and the central bank has expanded its repo scheme (short-term loans to banks), lowered capital requirements and increased credit lines to banks.
The rules state that no banks may make dividend payments, and further banks cannot earmark cash on the balance sheet as a future liability or dividends (until the end of September).
Many banks and listed companies which are constrained in their ability to distribute reserves to shareholders may opt to repay loans early if their balance sheet warrants it.
We’re also tracking the circumstances of individual companies through the Covid pandemic. Some are severely impacted and are in no position to pay dividends, whilst others are holding cash on the balance sheet. In the latter case we’re anticipating a wave of special dividends as restrictions are lifted or increased M&A activity as those with strong balance sheets acquire weaker competitors.
The situation remains volatile as the regular pattern of dividend payments is disrupted. As some central banks have not yet defined an end date on the imposed restrictions the expectation at Woodseer is for this disruption to continue.