By Thyagaraju Adinarayan and Sujata Rao
LONDON (Reuters) – It will take a decade for dividend payouts to return to pre-pandemic levels, futures markets are suggesting, a gloomy view that is at odds with the recent equity rebound and investors’ confidence that payments will normalise far sooner.
The pandemic could see dividends fall by over $100 billion this year just in the United States and Europe, analysts tracked by Refinitiv I/B/E/S predict. The global drop may be as big as $400 billion, according to a Janus Henderson report.
(Graphic: Global dividends total since 2009 – https://fingfx.thomsonreuters.com/gfx/mkt/bdwpkzddevm/Pasted%20image%201598005728376.png)
But futures are pricing worse.
These derivatives, which allow punters to take a position on future payouts, imply S&P500 dividends will be 16% below April 2020 levels in 2029. For Europe’s STOXX600 <.STOXX>, futures price 2028 payouts 18% below 2019 levels.
(Graphic: No full recovery from COVID blow in divis for years? – https://fingfx.thomsonreuters.com/gfx/buzz/nmovawjojva/Pasted%20image%201600454919081.png)
“Investors overall are still a bit cautious on dividends because people question whether or not we’ve got to the point of self-sustaining recovery or are we still simply subject to central bank stimulus etc,” said Matthew Joyce, director of equity strategy at Barclays.
Central bank stimulus has floored bond yields and fuelled an equity bounce. Yet the longer-term economic and corporate outlook remains uncertain.
Joyce reckons dividends may recover by 2022-2023, noting that futures pricing is at a heavy discount to a closely watched dividend index produced by IHS Markit.
This forecasts European dividends 13% below pre-COVID levels in 2022, versus the 30% drop futures are pricing. It projects S&P 500 <.SPX> payouts will return to 2019 levels next year.
So why the disconnect? And which is right?
Dividends did take four years to fully recover from the 2008-9 crisis so a decade may not seem too much of a stretch. But futures can be skewed by hedging as investors insure themselves against longer-term payment shortfalls.
(Graphic: 12M forward dividends for Europe, U.S. – https://fingfx.thomsonreuters.com/gfx/buzz/yxmvjblygvr/Pasted%20image%201600454345746.png)
“For people who trade dividend futures, it’s hard to see beyond the pandemic,” said Erik Norland, senior economist at the CME Group. “It may not be until 2021 that people look into the other side and price in scenarios on what the rest of the decade is going to look like.”
But it may prove challenging to match the 2010-2019 period when payouts rocketed by a record 155%.
That compares with 40% growth in each of the preceding two decades, Norland said, pointing to big budget deficits which governments could address by upping corporate taxes.
What seems clear though is that S&P500 dividends will bounce back well before Europe which is dominated by banks and commodity firms rather than cash-rich technology firms.
Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, predicts next year to be a record for U.S. payouts.
“We have gone through the (dividend) storm,” he added.
(Reporting by Sujata Rao and Thyagaraju Adinarayan in London; additional reporting by Caroline Valetkevitch in New York; Editing by Chizu Nomiyama)
