Coronavirus Considerations

The COVID-19 pandemic has curtailed ShareSoc’s events programme for now, but we have been busy in other areas and are very pleased to present a major website upgrade, the result of months of hard work by Mark Bentley and the team. We continue to communicate with members through our blog and newsletter.

ShareSoc questions recent corporate dependence on high debt levels and companies’ focus on private equity style efficient balance sheet management. Much of the commercial world is now highly levered and operating with minimal cash and equity buffers, making it totally ill-equipped to deal with business and supply chain interruptions such as the COVID-19 pandemic. Share buybacks have resulted in systemic leverage, often for highly questionable purposes. The stock market has not punished excessive leverage with an appropriate discount in recent years; perhaps as we emerge from the crisis we will see a rerating of stock prices with more credit being given for prudence.

An outcome of the business impact of quarantine has been the tendency of companies to suspend dividend payments. ShareSoc’s initial focus has been on the suspension of bank dividends, and our position there is that dividend suspension is an unfortunate but prudent measure to protect the banks against the wave of defaults which is expected to roll through their balance sheets. It is only one of a slew of necessary measures which include senior management foregoing bonuses and potentially salary and the regulator suspending liquidity coverage ratios (which are preventing liquidity from reaching end clients).

As regards the broader economy the arguments are different, and indeed differ substantially as between companies. Many companies face very substantial losses and are laying off staff (temporarily or permanently), and the question is whether they can morally justify continuing to pay a dividend where that is unlikely to be covered by profits and / or will have to be paid out of capital. There is at least an argument that the suppliers of capital should be sharing the strain.

Many pensioners depend on that dividend stream and are effectively dependent on the revenue underlying those dividends. A dividend suspension will require them to sell shares to generate cash at a low point in the share price history, which is very unfortunate. For that reason we would of course like to see companies maintain dividends where this can be justified, but not to the financial detriment of the business.

Mark Northway