How Covid-19 is affecting earnings guidance and dividend payments
Covid-19 has led to unprecedented levels of volatility, complexity and uncertainty for issuers, investors and investment banks. Accordingly, issuers are updating or suspending financial guidance they had previously published, and deploying a range of conservative capital allocation strategies, including cutting or suspending dividends and share buybacks.
IR Magazine is working with Intelligize, a LexisNexis company, to look at the number of companies that have withdrawn or suspended their guidance and reduced or suspended their dividend payments. To do this, Intelligize’s team runs several queries on its database of 6K and 8K SEC filings.
The first query scans for companies that discuss suspending, lowering, withdrawing or reducing their guidance in close proximity to references to Covid-19, coronavirus and pandemic. The second query looks for companies that announce suspending, delaying, discontinuing, deferring and withdrawing dividends, again in close proximity to Covid-19 and its aliases. Inevitably this will exclude some companies that may fit the description but don’t fit the database search.
This article was updated each week from mid-March to early June.
Number of companies withdrawing guidance
|Withdrew annual guidance||Withdrew semi-annual guidance||Withdrew quarterly guidance||Updated guidance|
|March 30-April 5||94||0||8||4|
|April 27 - May 3||118||0||2||29|
Source: Intelligize, a LexisNexis company
Since March 16, 851 companies have withdrawn annual guidance, based on the database query. Seventy-one companies have withdrawn quarterly guidance; of these, 52 companies withdrew annual and quarterly guidance at the same time.
Between April 13 and May 10, the number of companies updating guidance increased significantly, driven by firms making announcements ahead of their earnings calls. The vast majority of these companies were reducing their earnings guidance, although several upgraded their guidance.
Four companies during that time period suspended annual guidance while issuing quarterly guidance. One company conducted a scenario analysis that it included in its guidance update, basing its guidance on short-term disruption and long-term disruption.
Since May 11, there has been a sharp drop-off of companies suspending or updating guidance – an indication that earnings season has passed and a recognition that the number of companies that had already suspended guidance was unprecedented.
Earlier this month, Frank Caruso, chief investment officer of US growth equities at AllianceBernstein, and John Fogarty, portfolio manager of US growth equities at AllianceBernstein, published a blog post calling for a longer-term view of guidance amid the Covid-19 disruption.
'This chaotic moment provides a good opportunity to take a step back and re-evaluate the efficacy of forecasting EPS and valuing stocks based on P/E ratios,’ Caruso and Fogarty wrote. ‘Even with today’s market conditions, estimation error isn’t the only problem – because even if we could forecast the S&P 500’s 2020 EPS, any reasonable investor would argue that this year’s profits aren’t representative of the market’s long-term potential and should be normalized.
‘In other words, the accuracy of estimates doesn’t prove their validity… Shifting out the forecast horizon by several years reduces near-term variability and noise. It also anchors your perception of the worth of a business to its long-term fundamental success. We believe that it’s more appropriate to ground evaluation scenarios by assessing a company’s profit potential over the next 10 years.
On April 2, Etsy published a business update, which included the withdrawal of annual guidance, as well as top-line first-quarter results, in-quarter buying trends tracing the Covid-19 effect and a comment on the company’s balance sheet. Etsy’s vice president of investor relations, Deb Wasser, led a pre-recorded video conversation with CEO Josh Silverman and CFO Rachel Glaser, which was released on the company’s website along with a written transcript and telephonic dial-in information. The financial community and media could access it in multiple formats as needed. Wasser and her IR team drew on recent conversations with investors to craft the questions addressed on the call.
For Matthew Latino, senior director of investor relations at Xylem, it was important to stress that his company was doing all it could to protect its customers, employees, supply chain and other key stakeholders. Xylem suspended its quarterly and annual guidance on March 31.
Speaking to IR Magazine on April 8, Latino said: ‘We also felt it was critical to highlight our strong fundamentals and balance sheet, including our liquidity profile (and we went so far as to quantify it). This is a frequent question we have been getting from investors, which are making the rounds and confirming financial viability of their investments the last few weeks.
'Because we also included a limited amount of [Covid-19] impact in our previous guidance, we reminded investors specifically what that quantity was as they have a lot of companies to keep track of and latest updates from companies. We then explained what was different now versus our earlier expectations.’
There is a widespread expectation from investors that guidance no longer holds, according to several senior IR professionals at companies that have withdrawn annual guidance. With that in mind, these IR professionals – interviewed between April 6 and April 7 – recommended being transparent and proactive by suspending guidance.
Speaking to IR Magazine on March 26, Robert Brinberg, president of Rose & Co, said: ‘The coronavirus was such a quick and immediate shock, and the fact that it came after many companies had published their fourth-quarter results, published guidance for the year and held investor days made it further disruptive from a communications perspective. Months of hard work went down the drain, and many companies had to go back to the drawing board to reformulate their plans from the ground up.’
Gildan Activewear is one of the companies that suspended annual and quarterly guidance. The company had initially announced both forms of guidance on February 20, but held an investor call on March 23 to notify the investment community that it was suspending both forms of guidance.
Speaking to IR Magazine on March 31, Sophie Argiriou, vice president of investor communications at Gildan Activewear, said she was getting a lot of inbound calls from investors asking for an update. On the March 23 investor call, the company’s management explained the measures the company was taking to protect its staff, to ensure the liquidity of the company was secure and to provide an update on governmental measures that had been taken in countries like Honduras, where Gildan Activewear has significant production facilities.
‘You can’t sugarcoat things right now because nobody knows what will happen,’ Argiriou told IR Magazine. ‘I know you want to put people’s concerns at rest but we don’t have that ability right now. What they need to know is that your company can weather the storm and, when things go back to normal, your business is resilient enough to bounce back.’
She added that she has not received questions relating to withdrawing the company’s guidance after the fact.
‘Generally, the investor community doesn’t think any guidance will hold and is more forgiving in acknowledging that there’s some uncertainty,’ Brinberg said. ‘Prior guidance has not only become unreliable – it has been rendered entirely irrelevant. What is relevant is to ensure the narrative around operations, financial flexibility and decision-making is communicated clearly.’
Number of companies suspending or reducing dividend payments
|Suspended dividend||Deferred dividend||Reduced dividend|
|March 30-April 5||23||1||0|
|April 27 - May 3||21||2||7|
Source: Intelligize, a LexisNexis company
Between March 16 and May 31, 150 companies announced the suspension of their dividend programs while 34 companies announced reductions to their dividend payouts, according to the results of the database query. Twelve companies announced plans to defer first-quarter dividend payments.
Speaking at the IR Magazine virtual West Coast Think Tank earlier this month, Jill Carey Hall, head of US small and mid-cap strategy and senior US equity strategist at Bank of America Global Research, said: ‘The stocks that have suspended dividends or buybacks have underperformed by several percentage points the following week, between 5 percentage points and 6 percentage points last checked on Fridays. So there’s certainly some penalty for companies that do suspend cash deployments.’
But an IR professional at a company that altered its dividend schedule told IR Magazine on April 7: ‘Many of our shareholders have supported us and understood that this is a short-term decision for the long-term good of the company. The institutional shareholders get it, but some of the retail shareholders don’t have the full perspective. That’s where I’ve received more calls asking why we’re doing this.’
For this IR professional’s company, the decision to alter the dividend payments is explained in the 8K. For retail shareholders who don’t know to look there, that may cause confusion, the IR professional says.
As of April 4, retail shareholders at HSBC are rallying to try to call a special meeting in Hong Kong to discuss the company’s decision to suspend its annual dividend payment – something it has come under pressure from UK regulators to do, according to the FT.
On March 27, the European Banking Commission, Europe’s main regulator of the banking industry, recommended that banks not pay dividends for financial years 2019 and 2020 until at least October 1, 2020.
In the US, eight banks – including Goldman Sachs, JPMorgan and Bank of America Merrill Lynch – announced the suspension of share buybacks on March 15. The suspension will last for the remainder of the first and all of the second quarter of 2020.