Dividends fallout set to last beyond pandemic

Remember that just one company dividend cut caused havoc for income investors

At times of tumbling stock markets, dividend payouts have long been regarded as vital props for savers and pensioners. Capital values may fall, but if dividend payouts could be maintained then savers and pensioners would be spared the worst.

Many commentators have cited the income-generating capacity of companies to cushion market falls. That has held true in the past – until the past two weeks. For each day has brought a fresh shoal of announcements from companies that their dividend payouts are under review or have been suspended until further notice.

The list includes some of the UK’S largest corporates. Among household names that have suspended their dividend payments are British Land, Taylor Wimpey, Bellway, Whitbread, ITV and B&Q owner Kingfisher.

Much – much more – is yet to come. Sir John Vickers, former chairman of the Independent Commission on Banking, has urged the Bank of England to block more than £7.5 billion of dividends from banks – this on top of ten days of dividends being pulled as companies seek to preserve cash amid the Codid-19 pandemic. Few companies are spared. Among other bluechips cancelling or postponing payouts include Rightmove, Meggitt and Flutter Entertainment, while among mid-caps Domino’s Pizza Group, Essentra, Hill & Smith, Marshalls, Provident Financial, FDM Group and Coats Group all cancelled their 2019 final dividends.

Broker Panmure Gordon calculates that payouts worth £4 billion have been cut in March alone. And it expects that the previous record set in the previous financial crisis – when 31 per cent of companies cut their dividend guidance – will be smashed in the coming days.

Morgan Stanley analyst Graham Secker was quoted in newspapers warning that payouts will suffer a much bigger decline than in a typical recession. The bank expects dividends to plunge by 30 per cent across Europe compared with a “normal” 10 per cent drop.

A fall of this severity would wipe out £33 billion in investor payments in the UK – all the more dramatic coming as it does after last year’s record dividend payout level.

Savers who carefully constructed their stock market savings to maintain a level of income in retirement will be especially hard hit. Still others who looked upon equity income funds and trusts as “defensive” holdings have also suffered a shock.

Among the sharpest fallers in the investment trust equity income sector are Edinburgh Investment Trust (down 31 per cent), Aberdeen Standard Equity Income (down 34 per cent), Perpetual Income and Growth (down 39 per cent) and Temple Bar Investment Trust (down 40.5 per cent).

As Dzmitry Lipski, head of fund research at Interactive Investor, pointed out: “Those who remember the BP Deepwater Horizon oil spill almost exactly ten years ago will remember that just one company dividend cut caused havoc for income investors.

“A number of open-ended funds were forced to cut their dividends. It’s a good reminder that investors should not forget investment trusts, which have the ability to keep some of the income they receive each year and save for leaner years. It’s important to have a balanced portfolio – and that goes for the type of collective investments you hold, too.”

Richard Hunter, the firm’s head of markets, said: “A score of companies who have already reduced, deferred or cancelled their dividends is ample proof that, in terms of financial prudence, the lack of a dividend payment in the short term is already becoming an entrenched feature of UK plc.”

Meanwhile some companies that do not regard dividend payments as a priority and who have focused on capital growth have done relatively well in the stock market massacre of recent weeks.

One of these is the high-growth, techfocused Scottish Mortgage Trust. It has not emerged unscathed from the coronavirus pandemic: shares in the £7.9 billion trust have lost 9.4 per cent over three months, but are still holding on to a gain of nine per cent over 12 months (and a 111 per cent gain over five years). So far it has beaten the 25 per cent fall in world stock markets measured by the MSCI World index and the 31 per cent slide in the FTSE All-share

Scottish Mortgage is best known for its tech focus – its largest holdings are Tesla, Amazon, Alibaba and California-based Illumina, which provides products and services covering the sequencing, genotyping and proteomics markets. But the trust also holds investments in a large number of unquoted companies whose valuationschangeinfrequently–this would help make it more defensive when markets were sliding.

There is little at present that investors can do other than wait for this pandemic to peak and pass.

We are in a highly unnerving period, with fresh warnings at the weekend that measures to contain the spread of this infection may last for three months. Stock markets will stabilise in time, halting the slide in capital values. But the impact on company dividends is likely to be felt for some considerable time.