Don’t read too much into those green shoots

Whether in the garden, the economy or the stock market, nothing more lifts the spirits than “green shoots”. Our gardens are full of them, as they always are at this time of year.

But not all plants recover. Not all green shoots go on to deliver full blooms. And it can take much longer than we imagined for our shrubs and plants to reach their full glory.

On the stock market there has been much commentary of late about green shoots – and for fair reason. The FTSE 100 Index, which fell by a third on 23 March from its peak in early February, has now rebounded by 15 per cent – even allowing for the 2.3 per cent fall last Friday.

And the FTSE250 index, comprising midsized companies more representative of UK plc, has rebounded by 26 per cent since hitting the 19 March low.

It’s tempting to assume that the market is now in full recovery mode and set to climb further as the Covid-19 epidemic gradually subsides and we start to see a faltering return to “normal” – protracted though this may be. But this recovery is far from uniform. Some sectors, which I itemise below, look set for a transformative uplift in business and revenues. But many sectors – particularly those ever-reliable behemoth dividend payers such as Royal Dutch Shell – have been pole-axed and recovery from today’s levels is likely to be delayed well beyond the horizon.

Green shoots? Service sector companies, consumer-facing businesses such as retail, property companies and those with vulnerable long-distance supply chains have been devastated. Thousands of such businesses are unlikely to survive. Even greater state aid will be needed to help companies through the initial recovery period – and this on top of an already mountainous debt hangover to contend with.

The example of Royal Dutch Shell is telling. This widely-held share, equivalent in gardening terms to a long-surviving apple tree, has been especially popular with pension funds and equity income trusts. But it cut its dividend last week for the first time since the Second World War in the wake of the collapse in the oil price.

The first-quarter dividend cut by twothirds may hardly seem a great calamity amid all the tragic deaths, illness and massive disruption to everyday life caused by the coronavirus plague.

But the cut to its £11.6 billion dividend – evidence of how even the mightiest of companies has been brought low – will slash billions of pounds from pension fund and insurance company coffers this year, for Shell has been one of the UK’S biggest and most reliable dividend payers, accounting for nearly a fifth of total UK shareholder distributions.

Around 160 retail funds and investment trusts in the UK have Shell as one of their top holdings. And it joins many companies that have cancelled billions of pounds of dividend payments amid the coronavirus crisis. Financial administration company Link has forecast UK dividends could more than halve this year.

That leaves the army of individual investors and equity funds and trusts with a nasty gap in both terms of capital and income. Star fund manager Terry Smith has warned income investors reeling from huge dividend cuts that worse is to come. Banks have cancelled payouts under pressure from the Bank of England, which has praised the “prudent decision” by a number of insurers to shelve payouts. He believes the dividend cover among the FTSE 100’s biggest dividend payers suggested income investors were set for more pain.

“I would suspect that the boards of companies which have passed the dividend will indeed not be allowing a good crisis to go to waste and will return with a much smaller and more sustainable dividend which will mean lower yields for equity income investing.”

So there is much death – and large expanses of brown, barely living plants amid the sighting of green shoots. That said, there are glimmers of light for dividend-dependent investors. City of London Investment Trust pledged recently that it would use reserves to lift payouts for a record 54th consecutive year. Witan Investment Trust, a widely held global multi-manager trust, also said it would use its reserves to pull investors through the dividend drought.

But the Covid-19 pandemic has made the plight of income-dependent investors much worse. Bank interest rates are even lower and many asset classes are struggling – real estate investment trusts, for example, where commercial tenants struggle to pay rents.

It is a reminder that investors should be looking at total return rather than simply dividend income alone. Sectors set to enjoy an upturn include big tech, with a big rise in investment in cloud computing and network security. Healthcare businesses stand to gain from a building of strategic reserves, while local manufacturing companies should benefit from the moving of production lines out of China.

So, as with gardening, it pays to be selective in planting – and to continue to tend – feeding in small amounts on a regular basis over what is still set to be a turbulent period ahead.

There are glimmers of light for dividend dependent investors