The coronavirus crisis has highlighted infrastructure companies’ ‘social license to operate’1. The global lockdown has reminded us which services are essential for society to function at its most basic level, as we have all retreated into our own homes. Our basic needs come down to having the water running, electricity and gas supplied, and our WIFI working so that we can remain connected to the outside world. Infrastructure companies have a social license to operate – a factor that the Global Listed Infrastructure team integrates into our company analyses.
The way that companies have behaved during COVID-19 gives us further insight to their commitment to all stakeholders, and overall, they have performed well. Looking after all stakeholders is a fundamental part of honouring a social license to operate, so the pandemic should not have changed that.
We know that when companies fail to build their business strategy around all stakeholders, then regulators and politicians get involved. When that happens, the company never wins. We’ve seen time and time again that when companies do not provide adequate levels of service to their customers, or when they do not consider all stakeholders, their remuneration gets cut or future growth is diminished.
A time for collaboration
A notable outcome of the lockdown is the strong collaboration between business and government.
We have seen governments, communities and businesses all working together with the common philosophy that together we are stronger to get through this crisis. If all parties have worked well together this should only strengthen the relationships a company has with its communities and with the government.
We also believe that infrastructure can have a role to play in driving economic growth. Agendas such as the European Green Deal2 is. This program couldcan help in stimulating the economy through investment in renewable generation, electrification of transportation and decarbonisation of heating. This allows companies to accelerate their investment in renewables, which in turn leads to job creation and economic growth.
When it comes to dividend payments there’s no ‘one-size-fits-all’: as long term investors, we look at the sustainability of the cashflows and dividend.
Certainly, we believe companies who have accepted some form of government support should not be paying out dividends. However, none of the companies we invest in have opted for that level of support.
As such, the key deciding factor is the strength of a company’s balance sheet. Those with weak balance sheets and limited liquidity should not increase debt to pay out a dividend, just because they committed to it before the crisis. But we believe companies with strong balance sheets and no liquidity concerns should absolutely pay their dividend. These companies have significant retail investor bases, and many of those people rely on dividends for income.
Looking at how different infrastructure sectors will recover from the crisis, the structural drivers for all sectors should resume over time.
We believe that toll roads will be the first sector to rebound given they are tied to domestic movements. With lockdown restrictions easing, people will likely be allowed to travel within their own countries.
For airports, we anticipate that domestic travel will recover in a similar time frame to toll roads but international travel will take longer absent a vaccine, as countries will be unwilling to open their borders without some safeguards in place.
1 This concept refers to an organisation’s ongoing approval among the local community and other stakeholders to conduct their business.
2 A set of policy initiatives designed to make Europe carbon neutral by 2050
This material has been prepared and issued by First Sentier Investors (Australia) IM Ltd (ABN 89 114 194 311, AFSL 289017) (Author). The Author forms part of First Sentier Investors, a global asset management business. First Sentier Investors is ultimately owned by Mitsubishi UFJ Financial Group, Inc (MUFG), a global financial group. A copy of the Financial Services Guide for the Author is available from First Sentier Investors on its website.
This material contains general information only. It is not intended to provide you with financial product advice and does not take into account your objectives, financial situation or needs. Before making an investment decision you should consider, with a financial advisor, whether this information is appropriate in light of your investment needs, objectives and financial situation. Any opinions expressed in this material are the opinions of the Author only and are subject to change without notice. Such opinions are not a recommendation to hold, purchase or sell a particular financial product and may not include all of the information needed to make an investment decision in relation to such a financial product.
To the extent permitted by law, no liability is accepted by MUFG, the Author nor their affiliates for any loss or damage as a result of any reliance on this material. This material contains, or is based upon, information that the Author believes to be accurate and reliable, however neither the Author, MUFG, nor their respective affiliates offer any warranty that it contains no factual errors. No part of this material may be reproduced or transmitted in any form or by any means without the prior written consent of the Author.