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Are ASX 200 retail dividends safe amid COVID-19?

S&P/ASX 200 Index (ASX: XJO) discretionary retail dividends could be on the way down or cut after retail giant Harvey Norman Holdings Limited (ASX: HVN) cancelled its dividend last week. This was due to the uncertainty surrounding the retailer’s outlook in the wake of COVID-19.

In contrast, ASX supermarket shares like Woolworths Group Ltd (ASX: WOW), Coles Group Ltd (ASX: COL) and Metcash Limited (ASX: MTS) offer defensive characteristics. This is because people need to spend money on food in all economic conditions.

ASX discretionary retail shares

JB Hi-Fi Limited (ASX: JBH) announced an increase in sales in its March trading update. This was due to the surge in demand for office-related products. However, JB Hi-Fi may face the prospect of a dividend cut given that Harvey Norman also announced sales growth before suspending its dividend.

Due to lockdown procedures, JB Hi-Fi recently announced it needed to close its New Zealand-based stores. The company said this wouldn’t have a material impact on its results. This was days after withdrawing its FY20 guidance despite a surge in sales due to the rise in working from home.

JB Hi-Fi’s outlook and balance sheet position is of concern, stating, “there is an increasing level of uncertainty arising from COVID-19”. Will JB Hi-Fi be the next ASX retail share to retain capital to ensure flexibility in its operations?

A rise of unemployment will drive discretionary spending lower in the wider economy. With the measures to contain the spread of COVID-19 being essential, it does come with social and economic costs.  

Westpac Banking Corp (ASX: WBC) estimates Australia’s unemployment rate is set to rise to 11.1% in the June quarter. This doesn’t bode well for people’s livelihoods and their ability to spend.

ASX consumer staples shares

In Woolworths’ trading update on 24 March, the company disclosed sales growth across its retail businesses had been strong, reflecting unprecedented demand for a range of products. A strong balance sheet, access to liquidity and funding point to positive signs for the supermarket. However, Woolworths couldn’t accurately forecast the impact of COVID-19 on its operations.

Coles and Metcash are yet to provide a recent trading update. Having said that, I believe they would have faced similar conditions as their rival Woolworths.

Foolish takeaway

I believe avoiding the ASX discretionary retail industry is a smart move. This is especially considering prospective dividend cuts, rise in unemployment and a drop in GDP growth.

Safer options such as the supermarkets deliver defensive characteristics and are more likely to retain their dividends, in my view.

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Motley Fool contributor Matthew Donald owns shares of Harvey Norman Holdings Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. 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.