LONDON – Cutting or pausing dividends is a step that corporate executives usually do everything possible to avoid as it can scare off investors and prompt them to move their capital elsewhere.
But with their companies being squeezed by higher interest rates, tighter profit margins and an uncertain economic outlook that can put their credit ratings at risk, executives are being pushed to tighten their belts at the expense of shareholders.
So far this year, as many as 17 companies in the Dow Jones US Total Stock Market Index cut their dividends, Bloomberg journalists Jill R. Shah and Ian King reported on Friday. Pressure may build for more to follow suit as revenue and profits decline – and debt, as a proportion of earnings, grows. A wall of upcoming debt maturities is also increasing the need to retain cash on balance sheets.
For credit investors, it is a welcome change from the days when corporate executives opened the taps on dividend payouts and even loaded up on cheap credit to fund them. Data from S&P Dow Jones Indices shows that companies in the S&P 500 spent US$564.6 billion (S$762.3 billion) on dividends in 2022, the most in data going back to 2000 and up from US$511.2 billion in 2021.
By keeping that cash on their balance sheets, companies can stave off ratings downgrades that could make raising capital even costlier.
Intel, the world’s largest maker of computer processors, slashed its dividend payment in the past week to the lowest level in 16 years. The company saw its credit ratings slashed by all three major ratings companies in February.
The belt-tightening is not limited to cutting dividends. Companies are also taking steps that will be painful for employees, such as streamlining operations and reducing headcount.
As many companies tighten the spigot on shareholder payouts to keep creditors happy, at least one company in Europe is finding plenty of debt investors willing to keep the party going, Bloomberg reporter Lisa Lee writes.
Investors in recent days rushed to snap up a leveraged loan from French packaging company Eviosys that would add to the company’s debt pile to pay a dividend to its shareholders. Demand for the €350 million (S$499 million) loan has been so strong that Barclays, the arranger of the deal, brought forward the deadline to participate to Monday.
Such a deal, which creditors would often treat with caution, is a sign of how few opportunities investors are finding in the leveraged loan market. Deal volume has yet to fully recover from a tumultuous 2022 that saw issuance largely come to a halt. BLOOMBERG