How to stop your dividends going up in smoke...
BP is just the latest of a swathe of FTSE giants to cut payouts. But...
MIDAS
COMPANIES do not cut their dividends on a whim. Investors buy shares in these firms for a reason and bosses know that they will almost certainly be punished if payouts are suddenly reined in or cancelled altogether.
But, in the past six months, half of the FTSE 100 index of Britain’s biggest listed companies have done just that. Savaged by t he coronavirus pandemic and f earful about the future, they have chosen to cut or can dividends, often shocking investors in the process.
Last week alone, BP halved its dividend and said quarterly payments of 4p per share would be the new normal as it tries to become a ‘clean energy’ company rather than an oil and gas giant.
ITV scrapped its interim dividend and put future payments under review. Aviva partially restored last year’s final dividend but said shareholders would receive 6p rather than the 21.4p that the company had promised back in early March. New chief executive Amanda Blanc has also put the dividend policy under review, which normally means payments will be lower in future.
Some businesses have kept dividends at the same level as last year but few have been brave enough to raise their payments or make bold promises about the months ahead.
WHERE TO SEARCH FOR INCOME NOW
EVEN so, there are still plenty of high-yielding stocks in the FTSE 100. Yields are calculated by dividing the annual dividend payment by the share price itself. This shows the yearly income that individual stocks will pay. The average yield for all 100 companies remains above 4 per cent – comfortably ahead of savings rates – and a few stocks are offering double-digit yields.
The Midas Dogs of the Footsie portfolio tracks the ten highestyielding stocks in the FTSE 100 index. When we last analysed the portfolio a year ago, the world was a very different place. No one had heard of Covid-19, almost no one was thinking about a global pandemic and financial markets were mostly focused on Brexit and Boris Johnson’s new premiership.
At that time, our top two Dogs were housebuilders Persimmon and Taylor Wimpey, followed by Russian steel firm Evraz, cigarette maker Imperial Brands, utilities BT and Centrica and insurers Direct Line, Standard Life Aberdeen, Aviva and Legal & General.
Four of the stocks were yielding more than 10 per cent and all bar Centrica were offering yields above 8 per cent.
Centrica and Direct Line have since been kicked out of the FTSE 100, five more have cancelled or cut dividend payouts and Evraz is expected t o deliver a reduced dividend this year. The jury is out on Standard Life and L&G. Both have been hit by the pandemic but seem committed t o robust dividend payments.
A NEW BREED OF DIVIDEND DOG
PERHAPS not surprisingly then, the Dogs portfolio looks rather different today. The housebuilders are gone. BT is gone. Centrica and Direct Line have been demoted.
But Standard Life and L& G remain, along with Imperial, Evraz and Aviva.
Even though some of their forecast dividend payments have reduced, their share prices have fallen too so their yields (which rise as the share price sinks) remain buoyant.
These five are joined by a quintet of new pups – insurer M&G, pensions group Phoenix, mobile phone group Vodafone, British American Tobacco and BP.
It has been a long while since Gauloises, Winston and Rizla group Imperial Brands was in the portfolio with fellow cigarette maker British American Tobacco, the firm behind Lucky Strike, Dunhill and Rothmans.
A growing number of investors are shunning the entire tobacco sector, partly because they do not want to put their money into products that kill but also because they think these businesses will not deliver long-term returns.
That creates something of a vicious circle so Imperial and BAT shares have both been on a losing streak. At £24.92, BAT has more than halved in value in the past three years alone.
Imperial has fared even worse, slumping from more than £40 in 2016 to £ 12.49 today. The Rizla maker has had a particularly rough time. In February, the group issued a profits warning, after a crackdown on flavoured vaping products in the US stymied efforts to move away from traditional cigarettes.
Three months later, Imperial duly announced a 20 per cent slide in operating profits and a 30 per cent cut in the dividend, implying a total 2020 payout of 138p a share.
Yet today, the stock is yielding 11 per cent. The dividend may have fallen but it remains comparatively generous and the tumbling share price has kept Imperial’s yield on a high.
BAT has also suffered from growing antipathy towards cigarettes but the firm is proving more resilient than its rival. Last month, chief executive Jack Bowl es announced growth in revenue and
profits for the first half of the year and said total dividends for 2020 would amount to 210.4p, slightly up from 2019.
The shares are yielding more than 8 per cent.
CAN TOP DOGS KEEP PAYING?
FOR followers of the Dogs – and any other investors in high-yielding shares – there is one key question: are these dividends affordable?
All too often, companies will cut back on investment or dip into their reserves so they can maintain or increase their dividends. A shortterm fillip for shareholders, the strategy can backfire over time, as firms gradually realise that they simply cannot afford to carry on regardless.
Imperial has already bowed to the inevitable and cut its payout by a third but the 11 per cent yield suggests that City watchers expect a further cut.
BAT is on a lower yield but its dividend is covered just 1.5 times, meaning that for every 1p it pays out, the group earns 1.5p.
Most stockbrokers like to see earnings cover of two times or more, which implies that either BAT’s earnings need to rise or a change in dividend policy could be on the cards.
That is exactly what happened to BP. New chief executive Bernard Looney recognised that he could not cope with a persistently low oil price, invest fortunes in clean energy and keep shareholder payouts at previous levels.
Something had to give and last Tuesday, Looney delivered his dividend declaration.
Shareholders initially rewarded the boss for having the courage of his convictions and BP shares rose through the week, opening on Monday at £2.75 and rising to £2.87.
However, the stock has still fallen more than 40 per cent over the past year, so the shares are yielding 7 per cent, which brings BP back into the Dogs portfolio after a three-year absence.
Looking ahead, BP faces an uphill struggle, as the coronavirus pandemic eats into demand for fossil fuels. But the rebased dividend looks relatively secure, unless economic conditions become markedly worse.
Steelmaker Evraz, where Russian oligarch Roman Abramovich owns a 27 per cent stake, is also suffering from the tough corona virus-induced environment. Falling demand sent profits plunging in 2019 and last week the group announced further declines in sales and profits.
Yet chief executive Alexander Frolov seems determined to keep up dividend payments, confirming a 20c (15.2p) a share interim payout and suggesting Evraz remains confident about its prospects.
Brokers are less confident. The shares fell as the results were announced, they have slumped by nearly 50 per cent over the past year and are now on a yield of more than 8 per cent.
However, analysts have been wrongfooted by Evraz in the past, expecting a savage cut in the dividend, only to find that Frolov keeps on paying out.
They probably do things differently in Russia.
KEEPING AHEAD OF THE PACK
OVERALL, our Dogs have perf ormed poorly t hi s year. We restarted the portfolio in March 2012, investing a nominal £10,000. Today, it would be worth £12,118. That compares with £14,675 a year ago and more than £17,000 in 2018.
Yet our Dogs are still outperforming the FTSE 100. A nominal £10,000 invested in the index of the 100 biggest firms listed on the London Stock Exchange in 2012 would be worth just £10,104 today.
The Dogs are struggling but they are still ahead – and still paying higher dividends than the rest of the index.