On Maundy Thursday, the day commemorating the Last Supper and washing of disciples’ feet, Diageo pleased its followers by adding its name to the few companies that are paying dividends through the coronavirus crisis.
UK companies have scrapped £28.2bn worth of dividend to shareholders so far in 2020 and with a further £23.9bn “at risk”, according to calculations from Link Group, the next twelve months could see the UK dividend yield drop to 2%, well below the 3.5% average for the past 30 years.
As of Wednesday, 8 April, 45% of London-listed companies have cancelled or postponed their anticipated payouts, with Aviva (LON:AV.) and a raft of major insurers shelving dividends this week, and Lloyds Banking Group (LON:LLOY) and other banks also bowing to pressure earlier in the month.
A worst-case scenario, which includes adding the at-risk dividends, would see dividends for the whole of 2020 halved from the forecast level to around £46.5bn.
In a best-case scenario, dividends would still fall 29% from their forecast level to £70.4bn, which would only include cuts that have so far been announced or flagged.
On a 12-month forward view, this would see UK PLC yield 3.9%, according to Link’s calculations, with a “more realistic” range would see falls of 33% to £65.8bn and a yield of 3.5% in line with the 30-year average.
Around £29.6bn of dividend income is likely to be safe, Link said, mostly from classic defensive sectors such as grocers, food and drink producers, tobacco, basic consumer goods and healthcare.
Looking to the long-term, Link’s broad-brush assumptions about 2021, including an optimistic expectation that banks return payouts to near full strength and half of all the other cancelled dividends are restored, this would produced a yield of 4.8%, “suggesting the market is severely undervalued at the moment”, while a worst-case for 2021 suggests the market is now fairly valued.
Current consensus analyst forecasts point to a 12% drop in dividends relating to 2019, a 6% gain in 2020 and a 13% gain in 2021.
But with the unprecedented pace of the dumping of dividends, analysts are playing catch-up and still updating their numbers.
This isn’t easy, “they won’t know what to do — no-one has seen this before, so there is bound to be a lag”, says Russ Mould, investment director at AJ Bell and a keen dividend-spotter.
According to his model, total dividend cuts, deferrals and cancellations announced this year was nearer to £19bn, mostly payments for the 2019 financial year.
But he said as dividend payments are often split to one-third interim and two-thirds final, “if all firms were to pass the first half and pay the second, the 1/3 drop makes sense”.
“Not all firms will pass however but if you assume all of those to have cut/passed so far pay zero in 2020 then you get to £64bn in 2020, down 15% from downgraded 2019 numbers and down 30% from where forecasts were before this all began.”
With analysts’ earnings forecasts still looking “too optimistic” as they also catch up, the dividend cover in 2008-09 was around 2.7 times after a long recession.
This would imply, Mould said, dividends of £46bn for 2020, down from £75bn in 2019, so a 39% cut for a 3.1% yield.
“And if cover goes to 2.9 times, as it did in 2011, well after the recession, then that’s dividends of £43bn, for a 43% drop from £75bn in 2019 and a yield of 2.9% – way below the 5-6% investors thought they were getting 3-6-12 months ago.”
The Link research is based on the quarter the dividend is paid – using the actual payment date last year, excluding special dividends.
This has tracked confirmed cancellations and those that we think are as good as confirmed, a spokeswoman said, with the new ‘expect to cut’ category mainly based on payments later in the year or early next year of companies that have so far cancelled the impending payment only.