Times are tough out there and several companies have already cut their dividend. So far (fingers crossed) none of the stocks in my portfolio have announced a dividend cut.
Last Friday however, the board of directors from Danone SA announced that they will postpone the Annual General Shareholders Meeting which was planned for 28 April. See the below press release:
“Given the exceptional circumstances created by the Covid-19 outbreak that led French government to take strict lockdown measures, the Board of Directors of Danone which met today has decided to postpone the Annual General Meeting initially convened for Tuesday April 28, 2020 to a later date.
The payment date of the dividend for the 2019 financial year has therefore also been postponed. The Board of Directors will communicate later the new arrangements for the General Meeting, which shall in any event take place before June 30, 2020.“
Danone SA is one of the companies I just initiated a position in during this bear market. It was also on my watchlist back in March and I still aim to add more on any given opportunity.
I want you to know though that on several places online I read that Danone is cutting their dividend. Maybe I am naive 🤷♀️, but It’s not what I am reading in their press release. The writing as it is makes very much sense to me, because the AGM is typically the place to approve the proposed dividend. How can you technically and legally agree to paying a dividend before you get a formal approval from the shareholders?
However, there is a likelihood at the moment which puts every listed company in Europe currently at risk regarding their dividend safety. And that’s called monetary policy & politics.
As an example, the ECB issued a press release on 27 March in which it recommends all European credit institutions (read banks) to don’t buy their shares back and to not pay a dividend:
“The ECB considers it appropriate that the significant credit institutions refrain from
making dividend distributions and performing share buy-backs aimed at remunerating shareholders during the period of the COVID-19-related economic shock”
I don’t own banks in my portfolio, but this message from the ECB was a very strong message that also got picked up by the European media. Due to the massive layoffs that are already happening and many small-businesses being in trouble, there’s a mounting pressure from people and politicians to also suspend any dividend or share buybacks. This should allow companies to better preserve jobs, at least that seems to be the general opinion.
In these times you will often not win the popularity vote if you continue paying a dividend and I agree with that if the company doesn’t have a sound balance sheet that can weather this pandemic. And believe it or not, I heard the other day on the radio that pension funds also started to ask companies to suspend or cut their dividend payments.
Knowing all of this, I actually believe that Danone shouldn’t worry here for 2 reasons:
1. It already has a good reputation and it’s strengthening that during the current crisis, because it’s role-modelling as a corporate citizen (see video below).
2. The company looks also very good from a financial point of view and I have found no signs that make me believe that their earnings will suddenly fall of a cliff. That’s not the nature of a consumer staple like Danone during this crisis. People are still eating yoghurt and paying for it 💪.
Dividend Payout & Balance sheet strength
- Free cash flow payout: 54 % (1363/2510)
- Debt / Equity: 75%
- Interest Coverage: 8.17
My thoughts and expectation
Postponing the AGM was a very wise decision and buys the board of directors time to observe a bit more how the social-economic impact of the pandemic plays out.
I expect that if the political pressure increases, Danone will also cut their dividend, but mainly out of solidarity. That would be OK for me. Solidarity is a good behavior in these times.
However, I expect them to just pay the dividend if optimism among the people and politicians returns a bit in a month from now or if the pressure stays contained to financial institutions and companies that have been bailed out.
In such case I expect that Danone will just pay their dividend before the 30th of June. There’s financially speaking just no reason to cut their dividend based on the knowledge we have today.
Besides that, being a reliable company is also important to shareholders that rely on the dividends distributed by the company (i.e. pension funds).
In the end we will see what happens. It’s very interesting to observe how societies and the stock markets are responding to the pandemic.
I might also have my prediction wrong, but the only thing I really know for sure is that I will pay taxes again this year 😉
Stay safe and let’s keep giving some love to the dividends that keep coming in!
European Dividend Growth Investor