Europe’s dividends are falling more sharply

EEuropean companies will cut their dividends more than American companies because of the Corona crisis. This is the conclusion reached by Michael Bissinger, analyst at DZ Bank, in his current study on the profit distributions of public limited companies. Since the beginning of the year, distribution expectations in Europe have been reduced by around 25 percent for the current financial year. In contrast, they are almost unchanged in the United States.

Bissinger blames the structural disadvantage of the European economy for this development. Sector composition in Europe is much more focused on “old” industries, while technology dominates in the United States. This includes information technology and communication, which include the iPhone manufacturer Apple or the large Internet companies such as the Google parent company Alphabet, the online retailer Amazon or the software provider Microsoft.

These companies made the most distributions and would also have increased their dividends the most. In contrast, these areas played only a minor role in Europe. This is where industrial companies have increased their dividends the most since 2003. But now they are suffering the most from the corona quarantine and the recession.

Distribution block for banks

In addition, according to Bissinger, European banking regulators have advised institutions against paying dividends. This is tantamount to a distribution ban. And it is becoming apparent that the supervisors of the European Central Bank (ECB) want to extend the recommendation, which will apply until October, until the end of the year. In addition, according to Bissinger’s observation, the financial values ​​from 2009, i.e. after the financial crisis, would have had a negative impact on the dividend development in Europe.

Financials in Europe are currently distributing less than in 2003, but significantly more in the United States. This is also reflected in the significantly higher stock market values ​​of American banks, whose profitability significantly exceeds that of European competitors. However, in the first and second quarters, the large Wall Street houses such as JP Morgan or Citigroup had to pay tribute to the Corona crisis and set aside billions of euros for loan losses.

This also threatens in Europe, which is why the supervisors have given banks not only the dividend block, but also eased capital requirements so that they can support the economic recovery with credit.

The American companies reacted to the Corona crisis in a first step by partially stopping their share buyback programs. These are less common in Europe, which is why dividends are cut or cut here. When looking across the Atlantic, Bissinger raises a question mark because the spread of the coronavirus in the United States is still not under control and the daily new cases have recently peaked. Therefore, it remains questionable whether the American stock exchanges could continue to decouple from Europe.

Some companies in Europe have already canceled or reduced their dividends for the past financial year 2019. In the Stoxx 600, the broad index for 600 European companies, the dividends for 2019 that were or will be distributed this year have decreased by around a fifth. In the Euro Stoxx 50, which includes the 50 largest values ​​in the euro area, the figure was as high as 22 percent. By contrast, dividends for 2019 in the broad American stock index S&P 500 rose by 7 percent. Bissinger is expecting new insights from the now beginning reporting season for the second quarter of how badly the corona crisis is weighing on companies.


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