In case you haven’t picked it up, there’s a trend on the ASX for companies to cancel or defer dividend payments.
Engineering contractor Downer EDI Limited (ASX: DOW) is the latest on the S&P/ASX 200 Index (Index:^AXJO) (ASX:XJO) to delay the payment of its dividend after furniture retailer Nick Scali Limited (ASX: NCK) undertook a similar move yesterday.
Downer said it will defer paying its $83 million interim dividend until 25 September 2020. Investors were originally expected to be paid their 14 cents per share dividend tomorrow.
Justifying dividend cuts and deferments
But management feels that this drastic six-month deferment is necessary in the current environment.
“As we informed the market last week, Downer has a strong balance sheet, significant available liquidity and comfortable headroom in its bank covenants,” said Downer’s chief executive Grant Fenn.
“Nevertheless, in the extraordinary environment created by COVID-19 we consider it is appropriate to defer payment of the interim dividend until September 2020.”
Get out of dividend jail free card
It’s a little incongruous that Fenn reassured investors about the group’s outlook in the same breath. He explained that demand for Downer’s service is expected to remain strong as it caters mainly to government customers and work on critical infrastructure.
But he knows that investors aren’t likely to punish the company any more than other companies when so many others are doing the same. At least Downer isn’t totally withdrawing its dividend like embattled travel agent Flight Centre Travel Group Ltd (ASX: FLT) did.
These companies won’t be the last to break their dividend promises made last month when they issued their coronavirus-free earnings results.
Big banks next to commit dividend sin
The question now is whether Australia and New Zealand Banking Group (ASX: ANZ), National Australia Bank Ltd. (ASX: NAB) and Westpac Banking Corp (ASX: WBC) will follow the herd. The three ASX big banks will release their interim profit numbers and dividend details in May.
Looking at the collapse in their share prices, I think investors are factoring in dividend cuts. It’s difficult to say how much of a cut in priced into their share prices as the sector is hit on multiple fronts.
Their share prices have fallen between 40% to 50% each since the start of 2020. Its driven by fears of a surge in bad debt provisioning, margin squeeze and a big drop in credit growth.
The COVID-19 pandemic is of course responsible for all the woes as our government is forcing many businesses to shutter to contain the spread.
Many businesses, large or small, are likely to struggle to meet repayment obligations. Households are in a similar boat.
The move by the big banks to give repayment holidays for those hard hit by the economic shutdown will hurt their bottom lines – and ultimately their dividends.
In other words, investors should expect a dividend cut and possible payment deferment from the big banks.
But unless the world can get this pandemic under control, dividends may be a low priority problem we have to deal with.
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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited and Westpac Banking. The Motley Fool Australia owns shares of and has recommended Flight Centre Travel Group Limited. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.