Canada should focus on boosting economy even as debt climbs: analysts

TORONTO: Canada should focus on boosting economic growth after getting pummeled by the Covid-19 crisis, analysts say, even as concerns about the sustainability of its debt are growing, with Fitch downgrading the nation's rating just over a week ago.

Canadian Finance Minister Bill Morneau will deliver a "fiscal snapshot" on Wednesday that will outline the current balance sheet and may give an idea of the money the government is setting aside for the future.

As the economy recovers, some fiscal support measures, which are expected to boost the budget deficit sharply, could be wound down and replaced by incentives meant to get people back to work and measures to boost economic growth, economists said. "The only solution to these large deficits is growth, so we need a transition to a pro-growth agenda," said Craig Wright, chief economist at Royal Bank of Canada.

The IMF expects Canada's economy to contract by 8.4% this year. Ottawa is already rolling out more than C$150 billion in direct economic aid, including payments to workers impacted by Covid-19.

Further stimulus measures could include a green growth strategy, as well as spending on infrastructure, including smart infrastructure, economists said. Smart infrastructure makes use of digital technology.

"We have to make sure that government spending is calibrated to the economy of the future rather than the economy of the past," Wright said.

Canada lost one of its coveted triple-A ratings in June when Fitch downgraded it for the first time, citing the billions of dollars in emergency aid Ottawa has spent to help bridge the downturn caused by Covid-19 shutdowns.

Standard & Poor's, Moody's and DBRS still give Canadian debt the highest rating. At DBRS, Michael Heydt, the lead sovereign analyst on Canada, says his concern is about potential structural damage to the economy if the slowdown lingers too long.

Markets.Stocks

Wall Street week ahead: Clouds may be parting for dividend investors

REUTERS

NEW YORK: US companies are cutting their dividends less than investors anticipated, providing a potential boost to a stock market rally that has clashed with concerns over a recent surge in coronavirus infections.

S&P 500 companies are likely to see an aggregate 2% decline in 2020 dividend payments, compared with analyst projections earlier this year of around 10%, according to S&P Dow Jones.

That's good news for income-seeking investors at a time when a series of rapid interest rate cuts by the Federal Reserve has taken US Treasury yields to near zero, sending market participants further afield in search of steady payouts.

"We saw a devastating amount of dividend cuts, but the second half of the year does look a bit better," S&P Dow Jones analyst Howard Silverblatt said.

US financial markets are closed on Friday for the July 4th holiday. On Monday, data firm IHS Markit reports its surveys of US business activity, while Walgreens Boots Alliance Inc reports quarterly results on Thursday and US initial jobless claims are also due out that day.

S&P 500 companies slashed or suspended over $40 billion in dividends in the second quarter, the deepest quarterly drop since 2009, according to S&P Dow Jones. The cuts tapered off in the latter part of the quarter as the US economy began to rebound, fueled by Fed stimulus and easing lockdowns across the nation.

"The hope is that we have turned a corner, but that is going to depend on the reopening of the economy," Silverblatt said.

The fall in Treasury yields to historic lows has raised the allure of stock dividends, which are generally paid four times a year.

The gap between the S&P 500 dividend yield and the 10-year Treasury yield in March hit a high not seen since at least the 1970s, according to Datastream data, which does not go back further. Currently, the S&P 500's dividend is nearly 2%, compared with the benchmark 10-year US Treasury's 0.67% yield.

Jake Dollarhide, chief executive of Longbow Asset Management in Tulsa, Oklahoma, has been buying shares of dividend-paying companies that have also been outperforming in the epidemic, including Johnson & Johnson, Campbell Soup, General Mills, and retailers Costco Wholesale Corp and Walmart.

Johnson & Johnson, which is among companies rushing to develop a coronavirus vaccine, raised its dividend in April. In June, Kroger and Target, which have been seeing more business with people staying at home, upped their dividends.

"I have plenty of older clients who only want dividend stocks," Dollarhide said. "There are plenty of Covid-19 dividend plays," he added.

With California, Texas and many other states reporting record increases in new cases of Covid-19, the pandemic's trajectory remains the main source of uncertainty of whether more companies will suspend or cut their dividends.

Over 40% of the United States has now reversed or placed reopenings on hold, analysts at Goldman Sachs said in a recent note.

Adding to uncertainty about future dividends, the Fed last week capped big-bank dividend payments and barred share repurchases until at least the fourth quarter after finding lenders faced significant capital losses when tested against an economic slump caused by the coronavirus pandemic.

Wells Fargo shares have fallen about 1% since late Monday after the bank warned it would reduce its dividend as a result of the Fed's annual bank stress tests.

Still, only three S&P 500 companies decreased or suspended their dividend payments in June, while six companies upped their dividends, according to S&P Dow Jones.