Where financials are concerned, regulators in some jurisdictions have even requested that banks and insurance companies suspend or pare back dividend payouts for a set period of time.
The Europeans have led the way on this – the European Central Bank (ECB) has directed that banks suspend all dividends and share buybacks until 1 January 2021, extending the period of dividend drought from 1 October. The move is to be reviewed in the fourth quarter and the outlook for dividend payments beyond 2020 is to be data dependent.
Although the ECB’s assessment is that the banking sector is resilient overall, it does not want banks to end up acting pro-cyclically. Hence, banks have been given the flexibility to rebuild their capital buffers and provide against a rise in non-performing loans.
In the United States (US), despite additional restrictions imposed by the US Federal Reserve (Fed) in its stress test in June, most banks are expected to be able to continue their dividend payouts in the third quarter. However, there are a few special situations where dividends are restricted, and it is possible that dividends will not be allowed to be increased from their current levels through the first half of 2021. The Fed will once again consider the issue in the fourth quarter as it conducts an additional stress test on the banking system due to the COVID-19 environment. The Fed’s action will also likely be dependent on the path of the economy at that time.
Dividend Yields Across Regions
Dividend yields have always varied across regions (Figure 2).1 For instance, US dividend yields have historically been low relative to other regions and have tended to hold to the 2.0% level over time. US companies invariably use other tools to return cash to shareholders, including share buybacks and special dividends.