In a quarter of enormous pressure on dividend payers everywhere, Canadian blue-chips proved to be among the most resilient in the world.
Not only did big Canadian corporations resist the global wave of dividend cuts in the second quarter, they actually increased their collective payout by 4.1 per cent, according to a report by U.K.-based asset management firm Janus Henderson Investors.
The only other country that posted a year-over-year dividend increase was China, which is much farther along in its economic recovery.
“Canada has been a standout in global markets during the pandemic,” Matt Peron, director of research at Janus Henderson, wrote in an e-mail. “Not only has the disruption been less severe, but many companies entered the downturn in a solid financial position.”
You wouldn’t know that by looking at the stock market, however. The S&P/TSX Composite Index trails global stock indexes by a decent margin, and dividend stock performance is largely to blame for the gap.
The Dow Jones Canada Select Dividend Index, for example, which is heavily weighted in the big banks, utilities and telecoms, is trading 17 per cent below its February peak.
“The fundamentals aren’t being properly appreciated,” said Ryan Bushell, president and portfolio manager of Toronto-based Newhaven Asset Management. “These companies are trading like they actually did cut their dividends.”
Investor preferences have skewed heavily in favour of growth sectors, which have fuelled the global stock market’s bewildering rally to record highs over the past five months.
Many of Canada’s dividend champions have suffered from a worldwide aversion to value stocks, despite managing to maintain or even hike dividends amid a deep economic contraction.
Not that Canadian investors are immune to dividend cuts. More than 70 TSX-listed companies have reduced, eliminated or suspended their payments since COVID-19 sparked a simultaneous health and economic crisis.
But most of those cuts were made by smaller listed companies. In fact, only two Canadian names in the Janus Henderson Global Dividend Index – Suncor Energy Inc. and Cenovus Energy Inc. – cut or cancelled dividends in the second quarter. And in both cases, the financial strains predated the pandemic.
Janus Henderson’s index incorporates the world’s 1,200 largest listed companies, representing 90 per cent of dividends paid. More than 40 Canadian stocks meet the size threshold for inclusion in the index.
On a global basis, 27 per cent of companies paying dividends implemented a cut or suspension in the second quarter, slashing aggregate payments by roughly one-fifth – by far the worst quarterly result since the index was launched in 2009.
At least among large-cap stocks, Canadian dividends proved to be far more stable than the global average at the height of the global lockdown.
“What makes the dividend slice of the Canadian market so remarkably stable is that we have a concentration of what I would call economic backbone businesses that pay rich dividends,” Mr. Bushell said.
Having key industries dominated by relatively few companies has drawbacks for the consumer, but also seems to make Canadian dividends more resilient. Nowhere is this more apparent than in the banking sector.
Canada’s banks and other large financial firms, for example, account for roughly half of all Canadian dividends paid, according to Janus Henderson data. The banks famously maintained dividends through the global financial crisis, and are on course to repeat the accomplishment this time around.
“Canada’s big banks, which dominate the Canadian dividend landscape, are well-capitalized and crucially [the regulator] did not demand they suspend payouts either completely, as in the U.K. and Europe, or partially, as in Australia,” Mr. Peron said.
In March, the Office of the Superintendent of Financial Institutions directed banks and insurers to merely pause any dividend increases.
As to the likelihood of the banks cutting dividends in the quarters ahead, the odds are long, Mr. Bushell said. Dividends are generally treated as sacrosanct in Canada, and cuts tend to be received particularly harshly by investors.
“If Canadian banks are forced to cut dividends, that means we’re in big trouble in terms of the general state of the economy in Canada,” Mr. Bushell said.
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