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Dividend cuts are currently a hot topic for investors.
Consensus earnings forecasts ASX 200 payouts to fall about 30% this year. While some companies have cut or deferred payments, not all are.
The impact of Covid-19 has varied widely across stocks and sectors.
Some businesses such as international travel, airports, tourism, hospitality, casinos were shut down overnight. Some have seen little change in activity, including, essential services, construction, mining and agriculture. Others have been net beneficiaries, such as supermarkets, hardware, telecommunications, IT related businesses, data centres and retailers selling IT goods.
Unsurprisingly, performance across sectors has been more varied than usual.
Looking ahead, some sectors that have suffered on the way down should bounce back relatively quickly. Domestic tourism, toll road traffic, discretionary retail, elective surgery should improve quickly. International tourism, business travel, hotels and crowd-based entertainment will take much longer.
The ‘Digital Disruption’ and its impacts
Digital disruption has been accelerated rapidly by Covid-19. Growth in ecommerce, online retail, teleconferencing, tele-health, virtual conferences, on shoring of overseas call centres, working from home have seen 3-5 year trends occur in 2-3 months.
The impact of these rapid changes will cause surprise in the months ahead. Demand for office space, retail space, supply chain logistics, migration to the cloud, upgrading of telecommunication networks and investment in pandemic proofing the healthcare system are likely to feature.
So which portfolio structures work best?
When investing, it is critical to have a well-diversified portfolio of shares paying sustainable dividend yields. Look for stocks that have a reliable track record of growing those dividends and are supported by a strong balance sheet.
In this environment, we continue to favour a balanced portfolio structure across Growth, Defensive and International.
Companies with strong balance sheets that we feel their yield can be relied on include:
- Consumer staples with a defensive earnings profile (Coles, Woolworths)
- Well-capitalised overseas earners (Macquarie Bank, Magellan)
- Companies benefiting from the lockdown and the shift to online delivery (Domino’s Pizza)
- Global industrial property and logistics group exposed to the shift to ecommerce (Goodman Group) and
- Mining stocks with growing cash piles (BHP, Northern Star).
When the dust settles, investors will wake to the reality that the RBA has an official rate of 0.25% which means that deposit rates will be 1.25% (at best). The result after inflation and tax, investors will receive a return of negative 1%.
Under this scenario it is highly likely there will be an inevitable migration out of cash back into equities, in particular those with an above-average and ‘sustainable’ dividend yields.
Need guidance or advice, contact your CIB Portfolio manager.
