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Biggest dividend cuts in 10 years to hit ASX investors next month

man with hands on head looking at chart with red downward arrow, stock market crash
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Income investors should brace themselves for the worst dividend hit since the GFC when ASX companies present their profit results next month.

You can blame this on the COVID-19 meltdown with Bloomberg estimating that stocks on the S&P/ASX 200 Index (Index:^AXJO) could crash by up to 40% in 2020 and a further 11% in 2021.

The August reporting season is the first time ASX stocks will have to put their cards on the table since the coronavirus pandemic triggered a shutdown of the global economy.

ASX banks dividend disaster

We’ve already gotten a small taste of what’s to come with three of the big banks slashing or suspending dividends two months ago.

This explains a big part of why the Westpac Banking Corp (ASX: WBC) share price and Australia and New Zealand Banking GrpLtd (ASX: ANZ) share price are underperforming. They both held back from paying any dividend, while the National Australia Bank Ltd. (ASX: NAB) share price is under pressure from a cap raise and a 60% plus cut to its interim dividend.

Their financial year end is different from most other companies.

Risk of CBA suspending dividend is growing

I have written about how Commonwealth Bank of Australia (ASX: CBA) may have dodged a bullet as it releases its full year results next month. My initial thoughts were that the worst of the COVID-19 impact would be behind us and that management didn’t have to be as conservative on dividends as its peers.

But I wasn’t counting on a dreaded resurgence in coronavirus infections. Large parts of Victoria have gone back into a stage three lockdown and conditions seem to be worsening.

There’s talk that the state will have to go into a stricter stage four lockdown, while New South Wales may be next to shutdown vast parts of its economy if the spike in cases can’t be controlled soon.

Given the heightened level of uncertainty, it’s reasonable to think that CBA might suspend its dividend till later this calendar year. If our biggest home lender does this, it won’t be due to the lack of cash as its balance sheet can fund a decent payout. It will be because of fear.

Why many ASX stocks will be tempted to cut dividends

Other ASX stocks will be quick to leverage on this climate of anxiety too. The risk-reward for cutting dividends is too attractive for management teams to ignore.

In the first instance, boards won’t be flogged for committing the cardinal sin of dividend cuts during a global crisis. It’s almost like a “hall pass”.

On the flipside, if they don’t cut dividends to shore up their cash position, and they run unexpectedly run thin on capital later, they will be punished severely then.

Further, extra cash on the balance sheet will give ASX companies greater flexibility to boost their share prices later. This can be trough capital returns, business expansion or acquisitions.

On that last point, the COVID-19 turmoil is bound to throw up some opportunistic targets as several industries will likely be forced to consolidate.

Other ASX stocks at risk of dividend disappointment

Another sector that’s at risk of slicing or suspending their dividends in August is property. Retail and office landlords like Vicinity Centres (ASX: VCX) and Stockland Corporation Ltd (ASX: SGP) are doing it tough.

Any stock related to travel like Flight Centre Travel Group Ltd (ASX: FLT) and Sydney Airport Holdings Pty Ltd (ASX: SYD) will also be under pressure to keep as much capital on their balance sheets as they can. The recovery in international travel looks to be a long way off.

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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, Commonwealth Bank of Australia, National Australia Bank Limited, and Westpac Banking. Connect with me on Twitter @brenlau.

The Motley Fool Australia has recommended Flight Centre Travel Group 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.

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