It is not just share prices that have been under pressure in recent times as there has also been commentary on the short-term outlook for dividends in the UK owing to the impact of the coronavirus pandemic. In particular, businesses that are directly impacted by the coronavirus, such as those in the tourism, hospitality, aviation, retail and leisure sectors, will be highly unlikely to pay dividends this year.
What is happening to dividends?
Those businesses most affected by the coronavirus will have already, or will almost certainly, have to cut or suspend their dividend payments at least until the outlook becomes clearer, as their focus in the meantime will be on preserving their cash resources and in some cases, the viability of their businesses. Furthermore, any company that receives Government assistance is likely to find it particularly difficult to then justify maintaining dividend payments to shareholders.
Businesses that have a greater exposure to the economy are also likely to see their dividends come under threat this year. An example of this are housebuilders, where we have already seen a number of such companies announce dividend cuts owing to housing sales grinding to a halt.
For those companies that do have the financial resources to continue paying dividends at their existing levels, it is possible that they will also look to adopt a more cautious approach particularly if they expect to see a temporary fall in profits. Additionally, with the outlook so uncertain owing to the impact of the coronavirus on the economy, companies face the issue of it being near impossible to provide guidance on their earnings for this year.
The banks are amongst the largest dividend payers and it was announced at the very end of March that the UK’s largest lenders, namely Lloyds, RBS, Barclays, HSBC, Santander and Standard Chartered, had bowed to pressure from the financial regulator, the Prudential Regulation Authority (PRA). These banks have agreed to halt their dividends after being warned against paying out billions of pounds to shareholders during the coronavirus pandemic. In a series of co-ordinated statements, the banks said that they would cancel their dividends that were due to be paid in 2020, which were worth c. £7.5bn, and to refrain from setting cash aside for investor payouts this year. The banks also pledged not to carry out any share buybacks.
It is probable that this decision is one of prudence rather than necessity, in that capital ratios start in a very strong position and so not paying these dividends adds to this, which is what is intended. Furthermore, the decision also recognises that paying dividends when customers and borrowers face a period of great hardship would be at the very least insensitive.
The EU insurance regulator requested that European insurers halt dividends and although UK insurers are regulated separately, they have come under the same pressure. The PRA had already written to insurers to tell them to be “prudent” in light of their obligations to policyholders. This was more measured and open guidance than that given to the banks.
Like the banks, insurers’ solvency is much stronger than it was in the global financial crisis. Similar to the banks, any dividend cancellation would add to financial solvency and lessens the likelihood of any need for share issuance. However, it is possible that some companies may go ahead with some or all of their dividend payments if they are confident that this in no way contravenes the regulator’s request. We saw evidence of this when Legal & General stated in early April that it intends to press ahead with its planned distribution. This though was followed by the announcement on 8th April that Aviva, Direct Life, RSA and Hiscox would all halt their planned dividend payments in a decision that was subsequently welcomed by the PRA.
The current yield on the UK equity market doesn’t reflect the dividends that companies will actually be paying as it will not take into account the cuts being made as companies focus on preserving liquidity. As such, the dividend yield is likely to fall over the coming months, but with uncertainty over the final outcome of the pandemic, it is difficult to predict the actual income that might be paid during the rest of this year and into 2021.
Whilst dividend cuts or suspensions will impact near-term income and are potentially uncomfortable for investors, we believe it is the correct action in the circumstances. Implementing a cut in dividends in the short-term should help companies prioritise liquidity and solvency in the first instance and better position themselves to recover faster once we move past this crisis. We believe that this longer-term view is appropriate in the circumstances and will likely, in time, make dividend ‘recovery’ more feasible though they may still not return to the levels they were before the pandemic.
It is also worth highlighting that where the fund has a managed or a multi-asset approach, there will be some protection from dividend cuts as the overall income is likely to be derived from other sources as well, for example, interest payments from fixed income assets. CA5231 Exp:04/2021