The Impact of the Covid-19 Crisis on Common Stock Dividend Payout Policy

For many investors, dividends play a key role in evaluating the return of a common stock and the main reason for making the investment. For those investors, dividends are a necessary aspect since they are a vital source of income. But with the Covid-19 pandemic, many corporations have been adversely affected by a global economic slowdown. For publicly traded corporations, depending on its industry, dividends have been sharply affected to the point of either being reduced or suspended indefinitely. Using the Standard and Poor’s 500 stock index as a guide, stock analysts can possibly acquire a better understanding as to how reduced or suspended dividend income will affect different investors. The aim and purpose of this paper is to examine the affect the reduction and suspension of dividends will have as a source of needed income for private investors, pension funds, mutual funds, insurance companies, and real estate investment trusts.

www.scholink.org/ojs/index.php/rem Research in Economics and Management Vol. 5, No. 4, 2020 any kind of strict mandatory quarantine. According to Juliana Kaplan, Lauren Frias, and Morgan McFall-Johnsen (2020), Italy became the second country declaring its lockdown with the surge of massive Covid-19 infections starting from March 8 th , 2020. In order to curb the threat of Covid-19, many countries followed up by geographically quarantining themselves in declaring a state of emergency and using severe restrictions of mandating stay at home orders except for essential workers.
As it was reported by The World Health Organization (WHO), more than 100 countries were infected by Covid-19 causing a severe global pandemic. Those countries included the Czech Republic, Spain, Iran, New Zealand, Germany, India, Brazil, Japan, South Korea, and the United States. Figure 1 shows daily confirmed cases globally by the definition of the WHO with regions starting from January to June 2020. Figure 2 depicts the total up-to-date confirmed infected cases and death tolls worldwide during the first half year of 2020.

The anxiety caused by the Covid-19 pandemic started to reflect on global financial markets.
According to Pippa Stevens (2020), the Organization of the Petroleum Exporting Countries (OPEC) meeting between Russia and Saudi Arabia about slashing oil production in 2020 occurred on March 6 th 70  (2020) pointed out that on Monday, March 16th, that the New York Stock Exchange (NYSE) instituted its circuit breaker immediately after the opening bell rang since the index plummeted 8%. Contrary to the stock market, investors tended to seek more stable financial assets resulting in the U.S. Treasury securities market encountering an upward trend driving its yield-to-maturity down to an historic low. On March 25 th , the one-month, two-month, and three-month yield to maturity all tumbled down to 0.
A rare situation occurred on March 9 th where the one-month U.S. Treasury yield surpassed the 10-year rate by 0.03% as seen in Figure 8. This signal indicated that investors demanded higher yields towards short-term rather than long-term Treasury bonds. Normally, investors expect lower return on Treasury bonds in favor of more liquidity in the foreseeable near future. A financial concept named the inverted yield curve describes this abnormal situation and it is often regarded as a sign of an eventual economic recession. Based on this concept, the inverted yield curve occurred before the economic recessions in the years 1981, 1991, 2001, and 2008. 73 Published by SCHOLINK INC. www.scholink.org/ojs/index.php/rem Research in Economics and Management Vol. 5, No. 4, 2020   The global estimated gross domestic product (GDP) for 2020 shrank dramatically according to  Vol. 5, No. 4, 2020 GDP loss in 2020. The Euro area in 2020 faces the largest economic downturn by 7.5% and many of its economically robust countries were hit by the Covid-19 pandemic tremendously, such as Spain, Italy, France, and Germany. The countries in the Western hemisphere are in slightly better shape than the Euro zone in terms of GDP loss. Mexico faces a 6.6% GDP reduction while Canada and the United States have 6.2% and 5.9% losses, respectively, this year. India and China, the world's two biggest emerging economies with their fast GDP growth rate in the past decade slowed down their rate this year.  Vol. 5, No. 4, 2020 John Baffes and Ipek Ceylan Oymak (2020) address the possibility that cotton stocks of supply will reach a five-year high at the end of 2020 because of the lower demand due to the global pandemic.
Cotton prices are expected to drop by 12% in 2020 compared to 2019. Because the Covid-19 pandemic requires massive mobility restrictions, natural rubber's price tumbled starkly since two-thirds of its supplies are used for making tires; meanwhile, the consumption of fuel and fertilizer dropped significantly. The approximate supply to demand ratio in most grains and oilseeds, such as wheat, maize, and rice, spiked to historically high levels. Crude oil prices fell by 65% from January to April in 2020. The oil futures market witnessed an even more steep decline due to continuously low demand but in excess of the storage capacity.  Vol. 5, No. 4, 2020 Amusement, gambling, as well as the recreation industry have lost 59.9% of its jobs from February to April 2020. During the same time period, the scenic transportation industry surpassed that figure by having a 62.1% unemployment rate. (Bryan Pietsch, 2020) Due to stay-at-home orders and some countries' travel bans towards other countries, the tourism industry was hobbled by the coronavirus pandemic. Accommodation sector's occupancy rate reduced sharply in March. The accommodation sector includes not only hotels and hostels, but also the apartment renting business such as Airbnb, Sonder, etc. Around the world, guest numbers of the accommodation sector dropped more than 50%. (Stefan Gössling, & Daniel Scott, 2020). According to European Centre for Disease Prevention and Control (ECDC), after the pandemic, global flights tumbled over half a percent compared to pre-coronavirus.
The Covid-19 outbreak severely hurt the American labor market with millions of people losing their jobs. As seen in Figure 11, a sharp rise in the unemployment rate occurred in March 2020 and peaked at 14.7% in April 2020, resulting in a postwar record high. Before the coronavirus outbreak in the United States, the unemployment rate in February 2020 was the lowest since World War II.
Although the rate went down in June 2020 to 11%, Rakesh Kochar (2020)

Reactions of Companies
So far, until the second quarter of 2020, we have found 37 companies from the S&P 500 index that have suspended or reduced their dividend payouts. Figure 12 below shows the exact amount of dividend's suspension or reduction in millions of U.S. dollars.  Vol. 5, No. 4, 2020 In order to answer these three questions, correlation coefficient tests were performed between the amount of dividend payout on a quarterly basis and four other financial data strings that would be relevant to dividend payout. These four financial figures were net income, gross profit, total liabilities, as well as cash on hand. Correlation coefficient ranges from 1 to −1. The correlation coefficient of 1 means that for every positive increase in one variable, there is a fixed proportion of positive growth in the other. While −1 means that for every positive increase in one variable, there is a fixed proportion of negative decrease in the other. Zero means that for every increase, there is no positive or negative increase, which shows that the two are unrelated.
The Covid-19 pandemic possibly has a negative effect to many companies' economic and financial condition like Boeing, but is it an excuse for skipping dividends? Figure 12 illustrates that there is no significant positive relation between Boeing's dividend payout and its net income or gross profit based on the financial data sets provided from 2015. In other words, the amount of dividends Boeing pays has a weak connection with how much it earns or loses. Nevertheless, Boeing's dividend payouts negatively attached to its cash on hand. This interprets Boeing dividend payout reduction to its dividends to increase its cash on hand. In the second quarter of 2020, Boeing suspended dividends by U.S.$1.161 billion, and its cash on hand has doubled to U.S.$32.43 billion compared to the first quarter.
This increase in Boeing's cash also results from Boeing's debts. Total liabilities surged by U.S.$21.819 billion during the second quarter of 2020. Will the total increase of Boeing's debts negatively impact its dividend payouts? Figure 12 shows a weak relationship between Boeing's total liabilities and dividend payouts. In other words, Boeing can afford to pay dividends, but it might use the Covid-19 pandemic as an excuse for suspending dividend payouts.   Table 2)

Income (NI), Gross Profit (GP), Total Liabilities (TL), Cash on Hand (C) Per Quarter from 2015
to 2020 The most relevant financial data string to dividend payouts is gross profit, as it can be seen in Figure   13, followed by net income. Despite 10 out of 37 companies making decisions of suspending or reducing dividends under the guise of the coronavirus pandemic, 27 companies stopped or reduced paying dividends due to earnings loss after the virus crisis.

Effect of Dividend Policy Revision on Various Investors
Because different companies have changed their dividend payout policy, this will affect various investors in often devastating ways. The diverse types of investors listed below each count on dividends as a source of income, not just a return on their investment.

Pensions:
Various pensions invest in dividend paying stocks as a way to pay their pensioners a source of income that could possibly last for years. It is true that pensions will invest in long-term bonds, mortgages, and notes as a way to provide pensioners with income that could last for twenty or more years. But like any other investment portfolio, pensions must diversify their assets not only to spread out and minimize their risk, but also to possibly maximize the income they would receive in order to pass it on to their pensioners. Pension fund managers must be careful that by investing only in bonds, mortgages, or notes, then a change in interest rates could affect the value of these assets. By investing 82 www.scholink.org/ojs/index.php/rem Vol. 5, No. 4, 2020 in common stock paying healthy dividends, pension funds could diversify their risks but also create buffers in case of bond or note default or mortgage foreclosures.
The problem that pensions are now facing is that due to the Covid-19 pandemic, many companies are seeing their revenues and net earnings drop dangerously in a very short period of time. Subsequently, this is causing many companies to reduce their dividends in order to preserve cash at present levels or build up their cash reserves. Aside from the Covid-19 pandemic economic and financial consequences, pensions are facing a difficult time paying their pensioners in the payout stage due to dwindling amounts coming into their portfolios. For many pension funds, the Covid-19 pandemic could not have come at a worse time due to their present financial problems regarding reduced influx of contributions and capital.

Insurance companies:
Two key financial products that insurance company clients heavily depend on are life insurance and annuities. Each of these insurance products offer not only risk management but also are sources of income. With a life insurance policy, the policy owner can either hold on to the policy until the insured passes away and the beneficiary receives the proceeds or cash in the policy and invest in an income producing asset. With an annuity, whether fixed or variable, the client can receive an income that could possibly last a lifetime. But either way, an insurance company will need to invest in either bonds or dividend paying common or preferred stocks that will provide this income that eventually goes to the client.
Insurance companies need to invest in dividend paying common stocks for their annuities so that the income can eventually pass on to the client or also known as the annuitant. This income can supplement their Social Security and possible pension payments. But the problem that insurance companies face currently is that if dividend payments are curtailed, suspended, or reduced, then they will need to lessen the annuity income they pay to their clients. For many clients, this could mean a huge financial loss and a possible severe crisis in which they will have no way to make up this loss.
With the Covid-19 pandemic affecting the revenues and net profits of many companies that have dividend paying common stocks, which are purchased by insurance companies for their portfolios, their clients will suffer from a loss of income in the long and short term.

Mutual funds:
There are numerous mutual funds in the United States that have as their primary investment objective for the shareholders the payment of income in the form of common stock dividends. This is important for investors who need these dividends in order to supplement their retirement income from Social Security, pensions, and other sources of income they may have. Mutual funds, while they may not be appropriate for every investor, can work for those who want diversification and professional management in handling a common stock portfolio whose primary investment objective is income.
The problem is that with the Covid-19 pandemic and its effect on the macroeconomy of the United States, many publicly-held corporations whose common stock pays dividends will face difficulties in paying those dividends to investors. These investors include mutual funds. The problem will only get 83 www.scholink.org/ojs/index.php/rem Research in Economics and Management Vol. 5, No. 4, 2020 worse if the American macroeconomy falls deeper into a recession or possibly a depression. Not only will corporations go into bankruptcy but will also face liquidation and, of course, stoppage of dividend payments. The problem only gets worse as many of these types of mutual funds will be forced to shut down their operations causing their investors to lose money in their investments in the long run.

Real estate investment trusts (REITs):
The key idea behind a REIT is that an investor will indirectly purchase a stake in real estate held by the portfolio that will pay a substantial amount of its net earnings. This is important since there are investors who prefer the safety, security, and stability of owning real estate. This could take the form of investing in hotels, office buildings, retail stores, shopping malls, warehouses, resorts, apartment buildings, healthcare facilities, or nursing homes. All these investments are designed to pay a substantial amount of income, in the form of dividends, to the investors of REITs.
The benefit for the companies that hold the classification of REITs is that they operate, own, or are involved in the financing of real estate in which they pay 90 percent of their taxable income to their investors or shareholders. The benefit the REIT derives from this arrangement is that it will not pay any taxes on this income, but the shareholders will.
There is really nothing wrong with this type of arrangement since the investor is obtaining a substantial stream of income in the form of dividends for owning shares in the REIT. The real problem occurs when the properties held by the REITs do not produce the income stream they were expecting. Whether this income comes in the form of rents, lease payments, fees, or payment for staying at a hotel or resort, if there is a drastic curtailment, then the REIT investor will eventually feel this decrease. Because of the Covid-19 pandemic, many retail stores and malls have been shut down causing a serious drop in sales revenues. The main reason being that shoppers have stopped buying either because they are scared about the airborne spread of Covid-19 or they may have lost their jobs due to massive layoffs. These stores are then forced to shut down and face the very real possibility of liquidation or bankruptcy.
Retail stores that are somehow surviving this economic downturn have drastically cut back their rental payments and, in turn, the REITs that own the real estate where the stores are located have reduced or suspended their dividend payments to their investors. In the short run, investors are bearing the brunt of the loss of the dividend income stream they were expecting. In the long run, investors could see the value of their investment decrease far below the amount they invested.
Private investors: Individuals purchasing common stock for the primary reason of receiving dividends do so in order to supplement their income. These private investors most likely are senior citizens who are looking to supplement their income from Social Security, pensions, and personal savings. With certain corporations such as The Hershey Company, these private investors regard stock dividends as their primary investment objective. They are not really look for long-term growth in the value of the common stock. Given their personal and financial situation, this is a normal and acceptable investment objective.
The problem is when an unexpected event, a black swan such as the Covid-19 pandemic, occurs, then this will seriously hurt their investment and financial plans. Given that a substantial number of 84 www.scholink.org/ojs/index.php/rem Research in Economics and Management Vol. 5, No. 4, 2020 companies and REITs have reduced or suspended their dividends, many investors have had to rethink, reconsider, or rearrange their investment portfolios in order to regain their lost income stream. This is a problem since trying to find safe, reliable, and high paying investments as they were used to having could be nearly impossible to find at this time. Private investors many times are forced to invest in common stock since their dividend yield, even on an after-tax basis, is higher than what they will be receiving in a bank certificate of deposit, corporate bond, or a tax-free municipal bond. Private investors depending on common stock dividends are currently facing a dire situation and need to have patience as they ride out the financial storm caused by the Covid-19 pandemic.

Possible Future Actions by Dividend Paying Corporations
The battle between humankind and coronavirus will last for some time even after a vaccine is discovered: Dr. Anthony Fauci says the Covid-19 will never be eradicated. The world is in a rush of finding vaccines. The Medical Futurist notices that coronavirus vaccines are still under human trial stage and it takes time to find the safety and reliability of the vaccines. Moreover, even if the vaccine comes into production, it takes a certain amount of time to get most people vaccinated. Not only because the vaccine takes time to produce, but also there will be massive numbers of people who will refuse to have the vaccine. Shannon O'Keefe (2020) notes that 81% of democrats are willing to have the vaccine while 59% of independents, and 47% of republicans are under the assumption that there are free and FDA-approved vaccines available. Furthermore, according to his pool survey, the percentage of white Americans and non-white Americans who are willing to get the vaccines are 67% and 59%, respectively.
Thomas Metevia (2020) addresses in his news report that the Center for Disease Control (CDC) discovered that people usually get four common viruses during the winter months. He also cites that Dr.
Greg Poland points out the novel coronavirus may follow this pattern, and The Mayo Clinic's Vaccine Research Group warns that the combination of flu, which has been a devastating threat in America for a long period, and Covid-19 generates confusion due to similar symptoms. So, the coming fall and winter seasons will continue to get worse if sound preventive measures are not efficiently taken.
However, in the United States, we are seeing some pessimistic signs.  Vol. 5, No. 4, 2020 that money is a factor that drives universities to risk themselves to bring students back. Despite the fact that colleges are taking serious measures on-campus to prevent students and staff from getting the disease, it is hard for them to monitor the off-campus activities, thus risking the communities around the college students.
So, whether there will be a second lock down or a third, the answer is still not clear, yet we have witnessed some countries experiencing a second lockdown due to the re-surging infection cases. For example, South Korea and Israel.
Our third quarter economic prediction remains grim. Not only because of the fall and winter situation described above, but also some patterns we conclude from the second quarter. We witnessed in the second quarter the American real GDP shrank at a record pace of 32.9% according to the Bureau of Economic Analysis. Meanwhile, The New York Times reports that more than 30 million people are receiving unemployment benefits currently. Federal jobless benefits of $600 expired at the end of July.
A payroll tax cut as a pandemic relief has not been approved. The third quarter of domestic consumption will still remain devastating as people are receiving less benefits and some are experiencing layoffs and salary reduction. These individuals tend to be more likely to care about spending using cash, as well as being cautious of being involved in outdoor activities since the coronavirus is still there. Businesses re-opened in the second quarter, with many restaurants seeing their business begin to surge, but as soon as states like Florida, California, Arizona, and Texas were hit hard by Covid-19, these businesses began to fall sharply again after June. Governor Andrew Cuomo also warns New York restaurants to be prepared for a second closing in the fall. Moreover, most of the cities' offices are still in vacancy, such as New York City, since it takes time to bring staff back, which will ultimately contribute to the economy.
Some people may think the stock market has been experiencing a phenomenal rise from March to August, which may indicate a better economy ahead, but a jump in the stock market cannot represent a better economy ahead: First, large amount of newly printed money after the Covid-19 pandemic is finding its way into the macroeconomy. Turner Wright (2020) Vol. 5, No. 4, 2020 Second, we have seen the devastating GDP figure for the second quarter which makes America's economy look like a disaster, there should be at least one positive economic indicator which can bring American's confidence back again, so the current Administration has significant incentives to drive the stock market up, and make up for the loss of people's confident in the real economy.
Given the present situation with the Covid-19 pandemic and its economic and financial effect on corporations whose common stock pays dividends, regardless of the amount, there are possible ramifications and actions that they could take. These actions can vary, but the problem is how they will affect investors and shareholders. Among these actions include companies who have already suspended or reduced their dividends may continue to do so for the third and fourth quarter of 2020. As we discussed in this paper, the most related financial data to dividend payouts is gross profit in which we have seen those 37 companies that have already suspended or reduced their dividends have been experiencing huge gross profit loss in the second quarter, and may continue to fall in the coming seasons. So, if for companies who have high reliance on gross profit, they have a higher possibility of continuing to suspend or reduce dividends than the ones which have less dependence.
Some companies which have not yet suspended or reduced dividends but are struggling with earnings and carrying a huge amount of debt, they would possibly maintain the same dividend payouts, yet tests need to be taken for other specific companies. For example, there is American International Group (AIG). Figure 14 shows the reliance between its dividends and gross profit or even net income are low. It also has low dependence with total liabilities and cash. This indicates there would be high possibilities that it would remain the same in terms of dividend payouts.  Looking at AIG, we can assume there will be more stock buybacks in the future. More corporations may decide to stop paying dividends and have more stock buybacks. Having stock buybacks would actually help the market price of the common stock rise as opposed to paying dividends. Also, a corporation would not need to worry about having a stated dividend policy and not be concerned about the regularity of paying dividends. The corporation can have more freedom in how much it will buy back in common stock or use indicators such as a floor price that would trigger a stock repurchase. For certain shareholders, the possibility of seeing their investment yield higher returns in the long run may be a key motivating factor in increasing their stake in the company and giving up dividends.
For those corporations which have less reliance of dividend payouts with earnings may stop dividend payments to shareholders using economic and financial uncertainty as a major reason.
While this may be considered a valid reason in some cases, as the research in this article shows it may not always be a good reason. There could be corporations that are in the growth stage of their development, and either cannot pay cash dividends or pay a very minimal amount. A situation such as the Covid-19 pandemic could severely hurt a growth company since sales revenues could take a drastic downturn. And with their cash position possibly being very tight, dividends may not be feasible for a long time.
But in the case of a corporation with a healthy amount of cash, halting dividend payments may not be regarded as a valid excuse in order to preserve their cash. Shareholders may become quite angry about the reduction or ceasing of dividends since the corporation may continue to pay bonuses to the executive management team or upper level managers and also lay off the company employees. Trying to convince the shareholders that ceasing or reducing dividends is necessary may not be a smart strategy by these corporations and actually garner ill will from investors.

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Published by SCHOLINK INC. www.scholink.org/ojs/index.php/rem Research in Economics and Management Vol. 5, No. 4, 2020 Follow the lead of what Boeing is doing in 2020: It may be possible that other companies could follow Boeing's example and cease paying dividends even if they have the cash to do so. This could set a dangerous precedent for shareholders, now and in the future. These shareholders would include pensions, mutual funds, insurance companies, and private investors. Companies such as Boeing would need to financially justify their actions and possibly open themselves to legal action by shareholders.
Some may reduce dividends considerably: There could be corporations that reduce their dividends considerably. Again, claiming the economic and financial implications of the Covid-19 pandemic, the management team and the board of directors of a corporation may decide to drastically reduce its dividend payments. But if the decision is made to reduce dividends to 1 or 2 cents per share, this could possibly be considered as an insult to the shareholders. Also, the corporation is paying dividends for the sake of paying something out. The corporation could state in its investor relations literature that it has continually paid dividends, uninterrupted for so many years.
If we compare Boeing with AIG's actions to dividends, a question arises here: "Is this really fair for the shareholders?" Such a low number of dividends could be considered as an insult or, after paying taxes, hardly worth the time in cashing the dividend check. Certain shareholders may start a rebellion and demand the company forego all dividends until the economy gets better. Some others may say that an exceedingly low dividend is better than nothing at all. Yet, the real question is whether such a severe reduction in dividends is justified.
The American presidential election date is coming soon and the stock market is going to be more volatile when it gets closer to the election date, and tax policy is a key factor that will affect dividend payouts in the future. Simon Moore (2020) addresses in his article that tax policy is the main factor that impact the stock market. Low taxes generate more earnings and gives companies higher valuation estimation. So, if an administration with higher tax policy will be in charge for the next four or eight years, dividends would be further reduced at current level for a certain amount of time. The current Administration's tax cuts reduced corporate income tax from 35% to 20% at the end of 2017, and it is interesting to see most of the listed companies from the S&P 500 Index which pay dividends have increased their dividend per share since the beginning of 2018.

Low regular dividends during the course of a year and a bonus dividend at end of year:
A possible tactic that corporations may use is to pay a small number of dividends within the normal course of a year. Here the corporation may be able to save a substantial amount of cash and then determine the bonus dividend at year's end. This could be a method for the issuing corporation to pay extra dividends based upon the company's financial performance. If the company's financial performance is better than anticipated, then it could pay a higher year-end bonus dividend. A sub-par year would mean either lower or possibly no dividends at year's end. This allows the issuing corporation more flexibility in paying dividends. For the shareholders, this will mean no surprises at the end of year if they pay strict attention to the company's financial performance during the course of 89