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In the six months since the global pandemic forced the UK government to shut down the economy, around 445 companies listed on the London Stock Exchange have cancelled, cut or suspended dividend payments*.
Large or small, there has been no place to hide. Approximately half the FTSE 100 and half the FTSE 250 have seen payments reduced, as well as more than 100 companies listed on the AIM index, as firms seek to bolster their balance sheets and survive the impending recession.
But as we pointed out in July, UK dividend cuts may not be a bad thing in the long term. Well before the crisis, many companies had got into the bad habit of increasing payouts to please investors, rather than necessarily doing what was right for the company. Now they have the opportunity to reset dividends to a more manageable and sustainable level, and also to reinvest in the business again, which is better for the company’s future.
And in the meantime, although dividends have been cut, there is still attractive income to be made from the UK stock market.
Estimates FundCalibre has seen recently suggest that, overall, dividends will still be down by about 30% next year and down around 15% from 2019 levels in 2022.
There are some barriers to reinstating dividends: if staff are still furloughed, for example, it would be morally ‘hazardous’ to start paying dividends again, and banks have regulatory and political pressure not to do so. Sectors such as oil, banking, real estate, leisure and retail are unlikely to return soon to where they were – if ever – with many changes being structural.
But there are a number of big companies that have maintained their dividends, including Unilever, Reckitt Benckiser, GlaxoSmithKline, Jupiter financial Management and Rio Tinto.
There are also segments such as insurance, staples and mining, where payments could remain high and robust, with scope to bounce back quickly. And some companies have already reinstated their payments.
Examples include Smurfit Kappa, a leading corrugated box manufacturer with an increasing focus on ESG credentials; FDM, the specialist recruiter for the IT sector; and Belvoir, the property lettings agent. Persimmon, the house builder, has taken a more cautious approach and made a partial payment towards its ‘missed’ dividend with a commitment to reassess the remainder of this payment later in the year.
The upcoming year will likely be both unusual and challenging for income generation and the UK stock market’s dividend yield will be blown this way and that as some companies return to the dividend register and others make ‘catch-up’ payments.
As Richard Colwell, manager of Threadneedle UK Equity Income, says: “The scale of dividend cuts this year has been a concern. We are in constant dialogue with management teams to ensure rationales are scrutinised and full accountability is maintained.”
Kevin Murphy, co-manager of Schroder Income fund, tells us more about what the companies he is talking to are saying about their future payments in this podcast:
But individual funds could fare better than the wider market. Rathbone Income fund manager Carl Stick thinks the fund’s dividend will be down around 20% this year (with a yield of approximately 4% yield). Marlborough Multi Cap Income manager Sid Chand Lall also expects his fund to yield about 4%. And that’s considerably more than cash or government bonds still, as well as many corporate bonds.