Consensus EPS growth (%) progression - Jan to following Apr, 2011-2021
Heading into Q1 earnings with the worst earnings momentum on record
As the European Q1 earnings season begins we look at the downgrades so far and what information we are likely to get from corporate Europe about the impact of lockdowns on profits, dividends and balance sheets.
How far through the downgrade cycle are we?
Earnings momentum in April is the worst since the IBES data began 33 years ago. Nevertheless, with consensus earnings estimates now at -16% for 2020, we still see sizable downgrades to come.
What to look for
Clearly the impact of the lockdowns on performance in Q1 will be the first question. But we suspect it will be more important to look for signs of when supply chains and demand might recover, the impact on balance sheets / liquidity, the effect of the stimulus, will operating leverage be lower given government support and rapid cost cuts and what dividend policy might look like going forwards.
What about dividends?
Consensus estimates are for dividends to fall just 6% in 2020. We suspect that will also prove too optimistic. Dividends are usually partially insulated from the fall in earnings as pay-out ratios flex to take the strain. However, this time round with regulators pressing some sectors to cut or suspend dividends (Banks, Insurers) and unprecedented government support bringing political pressure on corporates, we see a far sharper fall.