By Thyagaraju Adinarayan and Sujata Rao
LONDON (Reuters) - A dramatic jump in equity dividend futures amid the continued rush of dividend cuts from companies desperate to preserve cash is implying growing confidence that shareholder payouts could make a comeback after this year's drought.
Companies from almost every sector in most countries have been culling dividends as coronavirus-linked lockdowns hit revenues and cashflow. In many countries regulators have upped the pressure to cancel dividends and share buybacks at a time when many employees have been laid off or furloughed.
But nothing lasts forever, investors are betting. That is reflected in dividend futures contracts -- derivatives that allow punters to cheaply bet on future payments and collect the difference if the dividend is paid.
Such futures plunged around 60% last month in Europe as well as the United States. But since early April, dividend futures for 2021 on the S&P500 have bounced 26%
The rebound is partly driven by a view that betting on company payouts is less volatile than buying shares outright. But many also reckon that dividend pricing had become excessively bearish, especially if gigantic global policy stimulus fuels a speedy economic recovery.
"Our view is that in this crisis, dividends are cut this year and next but it doesn't mean this will continue 3-4 years into the future," said Suhail Shaikh, chief investment officer at Fulcrum Asset Management in London.
Shaikh has bought dividend futures while selling underlying S&P 500 and Euro STOXX futures as "in the next three years those dividend contracts could go up 50%".
As virus cases approach the 2 million mark globally, and many countries extend lockdown periods to contain the spread of the disease, total dividend cuts by U.S. and European firms for 2020 should be double the tally of 2008-09, JPMorgan (NYSE:JPM) predicts.
That was the last time there was a sharp cut in dividends, which was triggered by the financial crisis.
JPMorgan estimates that while 130 companies on the STOXX 600 (STOXX) have cut dividends and 16 on the S&P 500 (SPX), another 30 firms in Europe will follow suit.
In this gloom, it may indeed be optimistic to expect a dividend recovery next year. But futures imply 45-50% dividend discounts as far out as 2024, relative to consensus estimates, Barclays (LON:BARC) noted late last week, describing this as "too harsh".
JPMorgan strategist Nikolaos Panigirtzoglou reckons the situation could normalise by 2022.
"It's surprising how pessimistic investors are... It's wrong to expect a 50% decline in dividends by 2022."
Graphic - Dividend futures: Pre-virus levels by 2022?: https://fingfx.thomsonreuters.com/gfx/buzz/xklpylqnvgd/Pasted%20image%201586880106003.png