This week seems to have seen a subtle change in the mood after the great dividend dump of late March and early April, providing some crumbs of comfort for income investors.
The sprinkling of companies saying they are keeping their payouts in place included FTSE 100 groups Pearson PLC (LON:PSON) on Friday, Unilever PLC (LON:ULVR) and Croda International PLC (LON:CRDA) a day earlier.
Also this week, blue chips London Stock Exchange Group PLC (LON:LSE), and Polymetal International PLC (LON:POLY) plus mid-caps Drax Group PLC (LON:DRAX), Centamin PLC (LON:CEY), Quilter PLC (LON:QLT) and IG Group PLC (LON:IGG) and small caps GoCo Group PLC (LON:GOCO), Fevertree Drinks PLC (LON:FEVR) and Personal Group Holdings PLC (LON:PGH) all kept their dividend returns in place.
Coming after UK companies dumped around £30bn worth of dividends so far this year, with only 14 FTSE 100 companies having pledged to pay out before this week, this was perhaps a significant line in the sand.
It might in some circumstances be a show of strength in some circumstances, such as Diageo PLC (LON:DGE) earlier in the month or gold miners like Centamin and Polymetal, while some companies remaining relatively unscathed or have even seen higher demand, such as Tesco PLC (LON:TSC) and Hilton Food PLC (LON:HFG).
It could be a case of giving shareholders the one things they need from a company that is not likely to see much growth but has enough cash and a strong enough balance sheet to keep up returns, though some companies may have looked at the growing bonfire of the dividends and seen it as an opportunity to slash and burn a burdensome payout.
BT is one that may spring to mind in this latter category in light of its investment plans, pension deficit and debt pile, and until today Pearson might have been suggested too, given structural problems over recent years, a negative impact of the pandemic on at least half its business and net debt rising to around £1.4bn.
Investor research with caution
While saying there is no denying that big names such as Unilever, for example, sticking to their dividend payment plans will be well received by investors, Russ Mould, investment director at AJ Bell, noted that some companies were still making U-turns on shareholder returns promised only last month, such as Computacenter this week.
“As a result, investors must still proceed with caution because companies will continue to do so,” Mould said.
Indeed, there still remains a dilemma in many people’s minds about whether shareholders returns will ever return to previous levels.
Analysts at UBS this week published a detailed note examining whether, when cash flows recover from the corona-crisis, it may become “untenable” to shell out as much of it on dividends and share buybacks.
As the pandemic has brought much greater visibility and attention upon social issues and inequality, the bank’s sustainability research team said they were “not convinced distributions will return in the same fashion as and when (or if) cash becomes available”.
Indeed, for corporations that accept government help in the form of relief from business rates, delayed VAT payments, the staff furlough scheme or perhaps even the Bank of England’s Covid Corporate Financing Facility, Mould says there will be a desire “to avoid giving the impression that they are drawing on the public purse with one hand and then handing that money to shareholders with another”.
“Wider society may well take a dim view of this,” he adds, noting that such perceptions did little for the reputation of Persimmon in recent years with regard to its dividends, special dividends and executive pay schemes, with the result that both the company chairman and chief executive were forced out of their posts.
“Investors will therefore have to keep doing their research on those firms upon whose dividends they are relying for income,” Mould says.
“But their analysis will need to go beyond earnings cover, cash flow, the debt and pension and lease obligations on balance sheets and the maturity timeline of any borrowings and take into account any assistance received during the current crisis and how front-line staff are being rewarded for helping to keep the show on the road.”
Dividend dilemmas still to come
On its recent research note looking at which companies are still paying dividend, broker Peel Hunt observed that after more than a third of FTSE 100 names having cancelled payments totalling around £16bn, with around £5bn of payments declared but not reconfirmed from around a fifth of companies and around a quarter of blue chip dividends normally pending in the next few months.
Among the blue chips still pending are Sainsbury’s and they may also be wary of making big dividend payments to shareholders any time soon, said Ulas Akincilar, head of trading at Infinox.
“In the current climate, the optics of such a move would be terrible,” he argued. “The collapse of spending in almost every other retail sector is pushing thousands of other stores toward the abyss.”
Ahead of next week’s update, Sainsbury’s board have the experience of larger rival Tesco to provide some direction, as no little debate raged over whether it is right for any company to pay a dividend when they have been supported by the government.
Analysts at Shore Capital admitted that this presented a “dilemma” for supermarkets, which have enjoyed elevated status among the public through the coronavirus lockdown.
On the one hand, Sainsbury’s, like its rivals, is paying store staff higher hourly wages through the crisis, has not furloughed any workers, is working with food suppliers and has not sought access to Bank of England funding, though on the other hand is eligible for 12 months of business rate relief from the government on its stores.
This relief, as Tesco indicated in its recent results, is “justified”, said ShoreCap, given the additional labour costs associated with feeding the population.
“With such stakeholder responsibilities largely satisfied, we can see a context for the Board to declare an ordinary dividend at a time when the stock market is being starved in many cases of dividends. We shall see,” the ShoreCap analysts said in a note.
Other dividend dependables
Among its list of confirmed payers, Peel Hunt’s FTSE 100 list read as follows:
Investment trusts still offered some investors with a more dependable source of income, with Supermarket Income REIT (LON:SUPR) one of the few REITs still paying dividends, and SDCL Energy Efficiency Income Trust PLC (LON:SEIT) also keeping true to its name.
Indeed, a survey this week from Interactive Investor found almost two thirds of respondents have maintained their risk profile despite the flurry of dividends cuts, but of those that were reassessing their stance, 12% said they are looking at investment trusts.
“Our poll suggests that investors are keeping a cool head and it’s no surprise to see that many are turning to the investment trust sector, where a number (but by no means all) are blessed with strong revenue reserves that have been built up over many years to help smooth dividends when times are tough,” said fund analyst Teodor Dilov.
“For many of the AIC ‘dividend heroes’, this is precisely the rainy day that many boards have been saving for and their investors will be grateful. But careful research is key.”
There were also a rare band of small cap companies still paying out dividends, including: