Chasing dividends in a pandemic

As in other downturns, dividends were an early casualty for many companies looking to cut costs and maintain cash flow through the severe business disruptions caused by the Covid-19 pandemic.

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But, for investors with a long-term outlook, the downturn created bargains on companies that will provide stable dividends for years to come, says Colum McKinley, managing director and chief investment officer for global equities at CIBC Asset Management.

Dividend stocks weren’t spared in the “indiscriminate” market sell-off in February and March, McKinley said in a May 21 interview.

In some cases, this made sense. A report from Capital Group last month said dividend cuts and suspensions have jumped to the highest level in more than a decade. This includes several firms in Canada’s embattled oil patch.

At the start of June, S&P Dow Jones Indices removed five companies from the S&P/TSX Canadian Dividend Aristocrats Index after they altered their dividends in response to the pandemic.

“There are going to be companies in the marketplace that are forced to cut or suspend dividends,” said McKinley, who manages the CIBC Monthly Income Fund. “I think there’s a period of time here where dividend growth and share buybacks are likely on hold, and this is very similar to what we saw during the global financial crisis.”

In the short term, he’s monitoring companies’ ability to navigate the uncertainty from the pandemic and maintain their dividends. Low debt levels and access to liquidity are important, and so is the ability to react quickly and reduce costs.

For the longer term, McKinley said he’s thinking about companies’ future earnings and excess cash that will allow them to resume or increase dividends.

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Pipeline companies are well positioned to sustain and grow their dividends, McKinley said.

“We think that the contractual relationships they have with customers allows them to have a higher certainty around their cash flow,” he said.

Enbridge Inc. reported a Q1 net loss of $1.43 billion last month, but its stock rose when it beat analysts’ expectations and cut costs while maintaining its dividend.

TC Energy reported a Q1 profit of $1.15 billion, and CEO Russ Girling said long-term contracts insulated the company from most of the commodity-price volatility.

McKinley also said he likes Canadian banks, despite current challenges with loan-loss provisions. The Big Six have allocated billions to cover losses from bad loans as the pandemic shutdown has caused business closures and layoffs.

But he said banks remain a great option for dividend income and growth.

“Capital positions today are stronger than we had during the global financial crisis, so we have no doubt in their ability to weather this uncertainty and, in fact, come out stronger in the support that they’re providing to their customers,” he said.

Finally, the shift to working from home has made Canadians more reliant on telecom companies and their critical service, McKinley said.

“We all have contracts for our cellphones and our internet connections at home, and we all know and see the need that we have on that on a day-to-day basis,” he said.

“So we think of these as businesses that are going to continue to generate excess cash flow and will be able to continue to distribute that excess cash flow to shareholders in the form of dividends.”

This article is part of the AdvisorToGo program, powered by CIBC. It was written without input from the sponsor.