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April 9, 2020, 8:37 a.m. EDT

S&P 500 dividends are in better shape than the market expects. Here’s where investors should worry, says Bank of America.

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By Barbara Kollmeyer, MarketWatch


Getty Images
Rough news on the doorstep.

Hopes that a pandemic peak may not be far away and that governments are at least thinking of exit-strategies from damaging shutdowns are the positives to cling to ahead of a long Easter weekend — one that could keep the grim headlines coming.

“The difference between now and the start of the pandemic is that we can at least see the end. We can see that we have flattened the curve, and we can reasonably project when the pandemic will be brought under control,” Brad McMillan, chief investment officer for Commonwealth Financial Network, told clients. Granted, zero infections may still be weeks away.

Our call of the day looks at the outlook for dividends, suspended or cut by many companies as they brace for coronavirus fallout. It comes from Bank of America Merrill Lynch, which sees big-cap S&P 500 /zigman2/quotes/210599714/realtime SPX +0.48%  in better shape to maintain dividends than in 2008/09, when investors saw a 24% peak-to-trough decline in those payouts.

“During the financial crisis, S&P 500 EPS fell 50% and more than 80 companies cut their dividends, with the biggest cuts in financials (which contributed a quarter of index dividends),” says a team of strategists led by Savita Subramanian.

Fast forward to the present, and technology and financials are the biggest contributors to index dividends, she says, and the plus is that both have fewer earnings-per-share fluctuations, payouts that are well below average and clean balance sheets.

“Tech has net cash, financials’ leverage ratio has never been lower,” Subramanian says.

So while the futures market is pricing in a 30% cut in S&P 500 dividends for this year, she expects closer to 10% and notes that market “grossly overestimated” in 2008/09 as well.

As for the risks, the bank sees share buybacks remaining under pressure, with financials and discretionary companies so far leading those suspensions. And smaller companies will struggle to maintain dividends, with expectations for 40% to 50% of those to cut versus around 13% of larger companies.

“Small cap leverage ratios are at record highs, debt maturities are half that of large caps, and small caps have the highest percentage of low-quality stocks ever,” says Subramanian.

The market

Dow /zigman2/quotes/210407078/delayed YM00 -0.46% , S&P /zigman2/quotes/209948968/delayed ES00 -0.49%    and Nasdaq-100 /zigman2/quotes/210219788/delayed NQ00 -0.49%  futures are up, and European stocks /zigman2/quotes/210599654/delayed XX:SXXP -1.44% are mixed. Asian markets /zigman2/quotes/211618636/realtime XX:ADOW +0.19% had a positive session. Oil prices /zigman2/quotes/209723049/delayed CL00 -1.18%  are climbing as a key conference between the Organization of the Petroleum Exporting Countries and its allies is due to get under way.

The chart

Torsten Sløk, chief economist at Deutsche Bank Securities, recently shared this chart showing who is bearing the brunt of job cuts right now:

/zigman2/quotes/210599714/realtime
US : S&P US
3,044.31
+14.58 +0.48%
Volume: 4.38B
May 29, 2020 5:14p
loading...
/zigman2/quotes/210407078/delayed
US : U.S.: CBOT
$ 25,261.00
-117.00 -0.46%
Volume: 10,461
May 31, 2020 7:08p
loading...
/zigman2/quotes/209948968/delayed
US : U.S.: CME
$ 3,027.00
-15.00 -0.49%
Volume: 64,118
May 31, 2020 7:08p
loading...
/zigman2/quotes/210219788/delayed
US : U.S.: CME
$ 9,513.75
-46.50 -0.49%
Volume: 17,308
May 31, 2020 7:08p
loading...
/zigman2/quotes/210599654/delayed
XX : STOXX
350.36
-5.11 -1.44%
Volume: 0.00
May 29, 2020 5:50p
loading...
/zigman2/quotes/211618636/realtime
XX : Dow Jones Indices
2,965.97
+5.69 +0.19%
Volume: 0.00
May 31, 2020 8:18p
loading...
/zigman2/quotes/209723049/delayed
US : U.S.: Nymex
$ 35.07
-0.42 -1.18%
Volume: 18,037
May 31, 2020 8:08p
loading...
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