forrado wrote:While it remains to be seen which income producing ITs will buckle under a wave of predicted dividend cuts. Such ITs that have been hailed by the media as ‘dividend heroes’ will be fighting tooth and nail to protect their ‘badge of honour’ status. Boards will not want to be seen to be disgraced and forced to yield in the eyes of their shareholders, and investors in general, after decades spent building dividend hero reputations.
I think that is so right forrado. I posted the same thoughts, rather less succinctly, on the previous page of this thread. To me, at least in the UK market, City of London IT (CTY) seems the most extreme example of this with the longest record, 50-something years of rising (I believe) dividends to protect. I do not think the board will want to break that record and might take quite extreme measures to maintain it.
Once dividends coming in from the underlying portfolio are no longer sufficient to maintain the absolute minimum dividend needed for CTY to keep its run of rising dividends going (declaring next year a dividend of 100.001% of the previous year for instance so essentially a freeze plus a minuscule increase to keep the "rising" bit going) then of course it has to dip into the reserve to keept distributions at the level it wants but I believe it is entirely possible that the shortfall in dividends might be deep and prolonged enough for the entire reserve to be eaten up. That is where things get interesting for ITs like CTY. At that point just how 'tooth and nail' will the board's fight become? Will they be willing to eat into the capital of the core portfolio to weather out the rest of the storm?
Obviously no one knows the answer to the above, even the CTY board probably doesn't know until it is actually confronted with such a decision and has data on exactly how deep and protracted such a dip into portfolio capital might be needed before a minimum of 1.0 cover is again seen, but to me that is the point where the really interesting (not necessarily in a good way!) decisions start being made. My hunch is that they would eat into capital for at least a year especially if, at the time that decision needs to be made, they thought that the end of the dividend drought from the underlying portfolio was in sight.
- Julian