As CEWS flowed in, dividends flowed out
Companies paid out more than $5 billion while receiving government assistance
Scores of publicly traded Canadian companies have continued to pay out billions of dollars in dividends to their shareholders while receiving government assistance in the form of the Canada Emergency Wage Subsidy.
A Financial Post analysis found that at least 68 companies received at least $1.03 billion in CEWS, a subsidy introduced by the federal government in April to help companies that had seen significant drops in their revenue cover payroll costs and avoid laying off workers. While they were receiving government assistance over the past two quarters, the very same companies paid out more than $5 billion in dividends.
Of the 68 companies, 11 either introduced a dividend or hiked existing dividends in the quarters that they received CEWS. The Post also found that 17 firms either introduced share repurchase programs or actively bought back millions of dollars in shares in this same time frame. Some companies such as Leon's Furniture Ltd., Titanium Transportation Group Inc., Secure Energy Services Inc. and Yellow Pages Ltd. did both.
The companies that spoke to the Post said there was no correlation between the money they received in CEWS and the money they paid out in dividends, and that the latter was entirely funded by either operations or debt. Governance experts, however, disagree and say that the Post's analysis raises concerns about the decision-making process at some of the country's largest companies and the government's inability to properly roll out subsidies in a manner that ensures funds are benefiting their intended targets.
“Think about what's happening: Taxpayers are indirectly subsidizing payments to shareholders,” York University professor and corporate governance adviser Richard Leblanc. “That is completely unacceptable. Even if the government didn't drop the ball, which they did, these noteworthy companies should lead by example. I expected more from Corporate Canada.”
The government has not yet disclosed the full list of CEWS recipients, so the Post populated its list of companies by searching for references of “CEWS” or “Canada Emergency Wage Subsidy” in Bloomberg's databases. The searches yielded more than 350 individual companies but the list is not exhaustive — those that did not identify the subsidy by name would not have been uncovered by the search. The Post read the individual disclosures of all 350 companies and eliminated the names of those that received
CEWS but did not pay dividends or had suspended them, international companies and those which merely referenced the subsidy but did not receive it. By the end, there were 68 firms left.
The list of companies receiving CEWS and paying dividends is wide-ranging. Not only is it composed of companies with market caps under $100 million such as Titanium Transportation, but it also includes some of the most well-known names in Canadian business like BCE Inc., Telus Corp., Canadian Natural Resources Ltd., Constellation Software Inc. and Suncor Energy Inc.
These companies were among the 355,990 unique applicants that government data show applied for the emergency subsidy as of Nov. 22. Across eight claim periods, the government has paid out $50.35 billion to both private and publicly traded companies. (Postmedia Network Canada Corp., the company that publishes the Financial Post, has been one of the recipients.)
More than 95 per cent of the applications, the government said, were for values under $100,000. Less than one per cent of the applicants received more than $5 million.
By comparison, half of the names on the Post's list received $5 million or more. In the case of Imperial Oil Ltd., the recipient dividend-payer that received the most in CEWS among those whose totals the Post was able to determine, the number soared to $120 million.
The millions some companies received in CEWS would have been enough to entirely offset dividend payments and still have some left over. For example, Finning International Inc. received $95 million in CEWS and paid out $68 million in dividends across two quarters. Aecon Group Inc. received $91.6 million and paid out $19 million in the same time frame.
For Leon's, the injection of $59.6 million over the past two quarters inflated the company's net income to historic levels that may look out of the norm after seeing how hard most retailers were hit during the lockdowns in the early months of the pandemic.
Leon's initially cut its dividend to $0.12 for its July dividend from $0.16, but raised it to $0.14 in time for its October payout. One month later, Leon's announced it would be hiking the dividend for a second time since the pandemic and that shareholders would receive $0.16 per share in January.
The furniture retailer paid $20.9 million in dividends over the past two quarters while it spent another $36.2 million on buybacks. Going forward, the company has also committed to an annual dividend that could see it pay out an estimated $22.9 million in January based on its outstanding shares. Leon's has also announced a special dividend, which could result in an additional $23.7 million exiting Leon's coffers.
“To be clear, we did not use the wage subsidy to pay the quarterly dividend, the special dividend or the repurchase of shares,” Leon's spokesperson Audrey Hyams Romoff said.
As for some of Canada's largest dividends payers in BCE, Canadian Natural Resources, Suncor and Telus, the relationship between the income they received from CEWS and the amount they paid out is unclear because they, along with nine other companies, did not disclose how much the federal government provided through the subsidy.
The Post contacted all 14 companies that did not disclose their CEWS income and only BCE, Peyto Exploration & Development Corp. and Suncor responded. Suncor did not provide a reason as to why it didn't disclose its numbers, while BCE and Peyto pointed to the accounting issue of materiality.
“CEWS subsidies received were not a material amount for BCE,” a company spokesperson said in an email without revealing the amount the company received.
The problem with such a response, Schulich School of Business accounting professor Amin Mawani said, is that materiality — essentially, the concept that determines whether excluding a number from a financial statement could affect investors and stakeholders — is often connected with the revenue of a company. If a company earns $5 billion in revenue, then a $50-million infusion of CEWS, which would have been the seventh highest on the Post's list, might be deemed immaterial, he said.
Beyond materiality, multiple companies argued that there is no relationship between the funding they received and the dividends they paid out. Asked why her company continued to pay dividends while receiving CEWS, Mullen Group Ltd. corporate secretary Joanna Scott wrote a three-page reply that detailed how the company funded its dividend payments and $23.5-million worth of share repurchases.
Scott said that at the beginning of 2020, the trucking company had $79 million in cash on hand and that it earmarked a portion of that cash to pay for dividends and share repurchases. The buybacks in particular were “determined by management and the board to be the best use of proceeds as the markets fell,” Scott said.
The CEWS payments, she said, were exclusively used by Mullen, which received $10.3 million in subsidies during the third quarter and paid out nearly $9 million in dividends, to bring back employees who had been laid off, provide additional sick days and to create new jobs, she said.
“The actions taken above in respect of our dividend, the NCIB and COWS were done to preserve the overall viability of Mullen Group, and our business units which collectively employ over 6,000 Canadians,” Scott said. “Had we not undertaken these measures, it was possible that Mullen Group, and our business units, would not have been around or able to weather the pandemic.”
Mullen and several other companies also pointed to the importance of their dividend and how sustaining it has been important from an investment perspective.
With the exception of Constellation Software, few names on the Post's list are growth stocks. Much like with Canada's big banks, the reason why investors are attracted to most of these names is they know they'll be consistently generating income.
Newhaven Asset Management Inc. president Ryan Bushell, who invests solely in dividend stocks for his clients, said some investors see a cut or a suspension to a dividend as a black mark. They'll drop a stock and never look back.
A cut or suspension almost always comes in line with a deep sell-off for the stock as well, Bushell said. There are entire indexes built on the length of time that companies have gone without cutting dividends, he said, and so a cut or suspension can result in a substantial loss of institutional funds, putting the average shareholder at risk of receiving a double gut punch.
Perhaps that's why Bushell, who owns several names on the Post's list such as Altagas Ltd. and Pembina Pipeline Corp., was understanding of the decisions made by these companies.
“I'm one of those investors who wants to see companies go through a hard time and make hard choices and keep a dividend at the top of their priorities,” he said. “I would rather see companies cutting salaries and cutting costs.”
In an interview, TFI International Inc. chief financial officer David Saperstein echoed Bushell's thoughts and pointed to the importance of upholding the dividend “regardless of the environment.”
“If you look at our history, you'll see every year since we've been a public corporation, we've paid our dividend,” Saperstein said, after his company received $24.9 million in CEWS and paid out $45.4 million in dividends. “We've never once reduced it or suspended it.”
But the Post found another 29 companies that received at least $519 million in CEWS and went another route. Companies such as CAE Inc., Cenovus Energy Inc. and Chorus Aviation Inc. suspended their dividends and kept them suspended while they benefited from CEWS.
According to Leblanc, there shouldn't be a concern. “You can suspend dividends in the middle of a pandemic, which is analogous to a world war,” he said. But there would have been no need to have this argument if the government had foreseen this outcome and rolled out its subsidies with the proper restrictions in place.
Leblanc said that at minimum, restrictions on taking CEWS should have included suspending dividend payments, putting a halt on buybacks and requiring companies to honour existing contracts with workers. The government, he said, should have also imposed full disclosure of CEWS by its recipients so that none of them could invoke immateriality.
“These are no-brainers,” said Leblanc, who believes the “rush to get money out the door” led to these restrictions being forgotten.
This isn't the first-time that a lack of restrictions resulted in questions being asked of how government funding was being used by Canadian companies, he said. The feds bailed out Bombardier Inc. with a $374-million injection in 2017, only for it to be revealed one month later that company executives were awarded US$32.6 million in bonuses.
Asked why dividend-paying companies are still allowed to receive CEWS, a Ministry of Finance spokesperson said the government's “top priority is supporting Canadian families and workers,” while also adding that the “wage subsidy can only be claimed for employee remuneration.”
Some other countries were more careful when distributing their subsidies, said Preetika Joshi, an assistant professor of accounting at Mcgill University's Desautels Faculty of Management.
For example, Spain introduced a program similar to CEWS, but is enforcing the repayment of the money they hand out if a company makes a dividend payment, she said. The Netherlands banned dividend payments, share repurchases and executive bonuses for companies that accept its equivalent of CEWS.
“The Canadian government doesn't seem to have a mechanism in place where they are looking at how the company did in the entire year. It's almost implied that it doesn't matter,” Joshi said.
Taxpayers are indirectly subsidizing payments to shareholders. That is completely unacceptable.