Now that the bargains have perhaps been snapped up, time to consider how these companies will look in the short to medium term.
As every month goes by, a new economic impact of the pandemic arises. The initial sharemarket crash was met with equal parts panic and equal parts “this is not a GFC, there will be a V-shaped recovery”. The government’s fiscal response has been unprecedented, and returned some confidence to investment markets, but it is clear that the path out is unlikely to be ‘V-shaped’ and it will take many months and years to recover. Perhaps the cheap ASX opportunities of February/March has now all been snapped up. Focus is now shifting to how will the companies listed on the ASX look in the future. More importantly, will they still pay dividends?
Shares in the Big 4 banks have long been the domain of retirees and other investors looking for income. Their dividend yields have always been attractive, and formed a significant part of retiree’s income (be it holding the shares in their pension funds, or personally). But in the last month, Westpac and ANZ have suspended their dividend and NAB have cut theirs substantially. This is causing some concern for those who rely on these dividends to provide regular income.
Much has been made of the fall in the bank share prices. Some have fallen by nearly half in the last 3 months. Has this been overdone? Only time will tell. The very things that made bank shares attractive in the past – their stability, profitability and dividend yields – are all now either under threat or have been impacted. It was a common theme in our discussions with clients about the recent NAB Share Purchase Plan – why should we take up extra shares when there is no guarantee of future dividends? It’s a valid question. By the way, my view is the move to suspend or slash dividends is sensible and prudent by the banks, and should ensure their ongoing viability.
And it’s not just banks. Sydney Airports, Scentre Group, James Hardie, Macquarie Group are among many companies that have suspended or significantly reduced dividends in recent months. There will be more.
The coronavirus came out of nowhere, smashed our markets, and perhaps will be well under control long before our economy recovers from this. If you are reliant on regular income from shares, should you be selling up and looking elsewhere?
My view is that no, you should hold the course and continue to build investment portfolios with high quality companies, even those who have suspended or reduced dividends. This won’t last forever. Our blue chip businesses will return to high levels profitability, and resume paying dividends. Sure, some companies perhaps won’t survive, and some will be mortally wounded, but it is likely that we wouldn’t have included them in a portfolio. The Australian sharemarket is likely to still produce income levels exceeding many other asset classes, even in this crisis.
When you buy shares in a company, you are buying for the long term. Dividends are important for many investors, but they are not the only consideration. This is potentially a once-in-a-lifetime scenario playing out now, but don’t lose track of why you invested in the first place, and be assured that investment markets are forward looking, and the lack of a complete capitulation in share prices is recognition that investors can see a return to a “new normal” at some point in the not-to-distant future. But it may take months or years.
Reviewing your investments are all stages of market cycles is important, and it has never been important than right now. Contact one of our advisers who are more than happy to ensure that your current investments match with your overall financial strategy.