UK dividend cuts: which sectors could bounce back and which may never recover?, September 2020

It’s been almost six months since the UK economy was shut down and we were all urged to “stay at home”.

During that time, around 445 companies listed on the London Stock Exchange have cancelled, cut or suspended dividend payments*. The number includes approximately half the FTSE 100, 108 firms in the FTSE 250 and 139 AIM companies. According to Janus Henderson’s latest Global Dividend Index, among the world’s larger stock markets, only France and Spain saw bigger declines than the UK over the last quarter**.

But amongst all the doom and gloom, some companies are continuing to pay. Rio Tinto, for example, which is one of the UK’s top-ten payers, announced a slightly increased payout.

We caught up with two equity income managers to find out what they are seeing on the ground and their thoughts on when dividends may recover.

Scott McKenzie, manager of TB Saracen UK Income

“It has been an ‘annus horriblis’ for UK dividends, with more than half of the FTSE100 index cutting or deferring dividends so far in 2020, and overall falls in total dividends of 40-50% now likely - a far cry from last year’s record of more than £100bn of ordinary dividends paid.

The high profile casualties have been notable, with BP and Shell succumbing to the reality of the move to a carbon neutral world, banks being restricted by loan provisions and regulatory pressure, and short-term economic devastation seen in cyclical sectors such as travel and leisure, construction, retailing and manufacturing. As the crisis has evolved, we have seen the strong, as well as the weak, defer or cut payments as they seek to maximise liquidity and flexibility.

“There are currently a number of potential barriers to dividends recovering: businesses where equity has been issued to strengthen balance sheets are unlikely to be in a position to see dividends resuming quickly; regulatory and political pressures are real, particularly in the financial sector; and exposure to government furloughing and loan schemes, as well as job losses, leaves many PLCs with a difficult line to tread.

“Given the severity and speed of this crisis it is understandable that many companies have suspended or cut their dividends. In normal times these cuts would represent failure, but these are far from normal times and, in the majority of cases, we expect the deferrals to be temporary. It is unrealistic though to expect dividend recovery to be broadly based.

“Sectors such as oil, banking, real estate, leisure and retail are unlikely ever to return to where they were, with many changes being structural. However, there are segments such as insurance, staples and mining, where payments will remain high and robust, with scope to bounce back quickly.

“As we look towards 2021, the outlook for dividends is far from clear and the scale and timing of payments may be subject to variance, particularly in the early part of 2021. However, now that a fuller picture has emerged regarding the loss of expected dividend income, there are some early signs of light at the end of the tunnel and recovery could be swift.

“If one takes a worst case scenario of a 50% fall in 2020 UK dividends, we would expect a 30-40% recovery in 2021. This would still leave overall dividends down by over 30% during the two year period. We would expect a further improvement in 2022, leaving to an overall shortfall of around 15% from 2019 levels.

“If we look at forecast dividend yields for the UK index over the next two years from today, we still have a potentially attractive, albeit reduced, dividend yield from UK shares of more than 4% by mid 2022. This compares to an income return of zero today from cash and UK gilts.”

Siddarth Chand Lall, manager of Marlborough Multi Cap Income

“The latest UK Dividend Monitor by Link mentions Covid-19 causing ‘unprecedented cuts in dividends in Q2 2020. Dividends fell 57%...’. This is well documented now and, looking forward 12 months, Link expects the UK market to yield 3.6% on a best-case scenario, or 3.3% in their worst- case scenario.

“It is not surprising then that a generalised view has formed about there being ‘no dividends in the UK’ with questions around earnings cover. Against this backdrop, it is important to share with you what we are actually seeing on the ground, both based on company reports and also our findings from video meetings/calls with management. And a number of companies - large, medium and small - from a range of sectors are doing ok.

“For example, holding Smurfit Kappa, a leading corrugated box manufacturer with an increasing focus on ESG credentials, has reinstated its dividend. So has FDM, the specialist recruiter for the IT sector and Belvoir, the property lettings agent. IMI, the global bespoke fluid controls business, reported a better than expected set of interims results and is paying the previously skipped final dividend and a rebased interim to create a level from which it can grow dividends sustainably.

“With companies switching on dividends again and the deep value on offer, we are definitely not short on new ideas too. We aim to do better than the market and Link’s expected 3.3%-3.6% yield range (detailed above) even though there is no formal yield test for the IA UK Equity Income sector at this time. It remains to be seen if Link’s caveated prediction of a ‘sharp rebound’ in dividends for 2021 proves correct.”

*Source: analysis by exchange-traded fund provider GraniteShares.
**Source: Janus Henderson Global Dividend Index, edition 27, August 2020
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the managers and do not constitute financial advice.

Published on 08/09/2020