The ramifications of dividend adjustments have been felt up and down the cap spectrum.
The adjustments also underscore the differences between dividend-focused ETF strategy methodologies and why performance may be diverging in our current environment.
With a global pandemic impacting consumer demand and corporate operating models, company cash flow trends have been altered. Some firms have cancelled their dividends to preserve capital to maintain staffing levels, support their workers or meet other operating expenses (i.e., debt service). Others have been forced to suspend dividends, as well as buybacks, as a result of receiving support from the US government under the CARES Act legislation.1
Either way, the ramifications of dividend adjustments have been felt up and down the cap spectrum, with more noticeable trends in certain sectors, irrespective of the size of the company. The adjustments also underscore the differences between dividend-focused ETF strategy methodologies and why performance may be diverging in our current environment.
Broad market dividend data
To facilitate the current dividend trend analysis, companies within the S&P Composite 1500 Index were analyzed and segmented by their respective market cap ranges: large cap (S&P 500), mid cap (S&P 400), and small cap (S&P 600). Any firm where the most recent or projected2 dividend is lower than its prior four-quarter average was counted as a decrease. Suspensions and omissions were much easier to identify, as a dividend was no longer published.
For the S&P 1500, 84 firms have suspended their dividend, roughly 6% of all firms. The actual weight of those firms represents just 1% of the S&P 1500’s market value, as many are small-cap firms. The table below depicts the breakdown for the broader market and the different size segments. Small-cap firms, where 4% of the S&P 600’s market cap has cut their dividend, lead all segments.
Market Cap Breakdown of Dividend Cuts
Total Stocks in Exposure
Suspended % of Stocks
Suspended % of Exposure Market Cap
Source: Bloomberg Finance L.P. as of 04/16/2020, calculations by SPDR Americas Research. Total number of stocks are more than 1500, 500, and 600 as a result of dual share class structures.
The greater number of dividend cuts further down the cap spectrum is not surprising. Large-cap stocks, with the stability that comes with mature multinational businesses with diverse revenue sources, may have more reliable cash flows.
Small-cap stocks, however, are unproven, have less consistent cash flows and are also more levered, as measured by net-debt-to-EBITDA ratios.3 But they do offer the potential for further expansion and market penetration if and when growth returns. And mid caps offer a unique combination -- of the managerial maturity associated with large caps and the operational growth of small caps. As you might expect, the number of dividend cuts for mid caps sit in the middle of large caps and small caps.
Sector biases across cap spectrums
Breaking out the dividend actions by sector provides additional context into the current trends; no matter the size segment, Consumer Discretionary stocks had the most suspensions. At the industry level within Consumer Discretionary, the suspensions were driven by Hotels, Restaurants, Leisure, and Specialty Retail. This is no surprise, given the economic fallout from most of the country sheltering in place on businesses that rely heavily on consumer spending. Another interesting trend within Consumer Discretionary is that some large-cap firms, as a result of their likely more stable footing versus their small-cap peers, just decreased, rather than cancelled their dividend.