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Dividend distributions - A catalyst for performance
21 Dec 2020
As the end of the year approaches, it is the norm within the investment community to take stock of our current investment strategies and device an outlook for the upcoming year. This provides a platform to make calculated adjustments to our tactical positioning if needed. 

This time last year, none of us had forecasted how 2020 would pan out although in December 2019, news started flowing that the first human cases of COVID-19 were being reported in Wuhan. The highly infectious nature of the virus quickly led to neighbouring countries reporting imported cases during the start of 2020. Back-then, however, little did we know the real impact that this virus was going to have on the real economic front. Undoubtedly, this has put unprecedented pressures on Central Banks and Governments to intervene with decisive policy responses to help businesses survive the pandemic. That said, although most economies received help from different authorities, recessions were inevitable and COVID-19 had plunged the global economy into the worst recession since World War II.

The first major sign of a recession was perhaps the stock market crash in February 2020, which was the fastest global stock markets drop in global stock markets in history. Malta’s stock market was no different and certain sectors like the hospitality, leisure and retail were amongst the worst hit. This was the result of an indiscriminate effect that this virus was having across sectors. 

Similar to their European peers, the local financials sector has been negatively impacted by the COVID-19 spread, which according to latest company announcements made by the listed companies in this sector, profitability has significantly declined when compared to the same period last year. On the other hand, most of these announcements have shown some sort of optimism for the third quarter when compared to the two previous quarters of 2020. Although the challenges for this sector are expected to remain until consumer confidence recovers. However news that the vaccine will be shortly rolled out augurs well for many of our listed companies and some investors have already started rebuilding positions in the market. One has also to keep in mind that the financial sector is also facing the effects of an extremely low interest rate environment.

Undoubtedly, the hospitality and leisure industry suffered a major blow, which sector is directly related to tourism. The uncertainty brought about by the pandemic and the loss of direct air connectivity has played an important role for the huge adverse impact that this sector has faced. With one of Malta’s largest contributors, tourism, under threat, a shock to the sector was inevitable. However, as COVID-19 related issues started to fade out, a crucial point for Malta will be the restoration of significant number of direct air connections lost during the pandemic, which plays a key role in facilitating economic developments through various channels, such as tourism.

Recently, we carried out an analysis on five companies which are listed on the Malta Stock Exchange (MSE) that had initially announced and eventually cancelled their dividend distribution during the year due to factors related to the pandemic. The main reason for the cancellation of dividends in the banking sector was a recommendation by the European Central Bank in March 2019, and during July 2019 this was then extended further until January 2021. The main aim of this recommendation, which is exceptional by nature, is aimed to preserve banks’ capacity to absorb losses and support the economy in an environment of exceptional uncertainty. Likewise, EIOPA, the European Body for Insurance and Occupational Pensions has also issued a recommendation to its industry not to pay dividends. Another company which is directly related to tourism has cancelled its dividend payment in order to manage its cash reserves in a moment of severe curtailment in revenue streams.

The companies that were analysed amount to almost half of the market cap of the MSE, which have a significant bearing on the performance of the local market. To gauge the importance of the dividend in the local market, an equally weighted portfolio was created, which was then split in three different timelines. The first period from January to April was analysed to capture the real effect of COVID-19, the second part from May to October was evaluated to test the impact of the announcements, what we dubbed the “no-dividend” effect, and from November to the time of writing to capture the turn-around of this pandemic, where pharmaceutical companies were announcing the efficacy rates of their vaccines.

It was concluded that during the ‘no-dividend effect’ period, prices have reacted more negatively when compared to the start of COVID-19 period. This implicates the importance of dividend in the local stock market which represents an income driven local investment community. During November, the performance of equities under scrutiny have improved drastically, which is of benefit for those shareholders who will seek to take investment opportunities with a medium to long term horizon. As more top European Central Bank officials continued to voice their support for the ban on the financial sector to be uplifted, on the 15th of December the ECB announced that limited bank dividends may resume.

This will continue to support investor confidence which intrinsically can be transposed to capital gains on their shareholdings. On the other hand, despite optimism that the end of the pandemic is in sight, regulators are wary that if they allow no restriction on payouts, the sector might lack the financial reserves to bear any possible losses. The uplifting of the ban albeit limited, will be of a great benefit for those investors who have managed to catch the bus earlier.

This article was written by Clayton Scicluna and published on the Sunday Times of Malta on the 20th December. 
Clayton Scicluna is a Portofolio Manager at BOV Asset Management Limited (“the Company”).  

The writer and the Company have obtained the information contained in this document from sources they believe to be reliable but they have not independently verified the information contained herein and therefore its accuracy cannot be guaranteed. The writer and the Company make no guarantees, representations or warranties and accept no responsibility or liability as to the accuracy or completeness of the information contained in this document. They have no obligation to update, modify or amend this article or to otherwise notify a reader thereof in the event that any matter stated therein, or any opinion, projection, forecast or estimate set for the herein changes or subsequently becomes inaccurate. BOV Asset Management Limited is licensed to conduct investment services in Malta by the Malta Financial Services Authority.  Issued by BOV Asset Management Limited, registered address 58, Triq San Żakkarija, Il-Belt Valletta, VLT 1130, Malta. Tel: 2122 7311, Fax: 2275 5661, E-mail: [email protected], Website: www.bovassetmanagement.com. Source: BOV Asset Management Limited.

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Bank of Valletta p.l.c. is a public limited company regulated by the MFSA and is licensed to carry out the business of banking and investment services in terms of the Banking Act (Cap. 371 of the Laws of Malta) and the Investment Services Act (Cap.370. of the Laws of Malta).