Investors braced for big dividend cuts
ITV, IWG, Fuller’s and Kingfisher join companies set to end decade-long run of bumper payouts
Investors are braced for savage cuts in dividends across the FTSE 350 as companies hoard cash to see them through the coronavirus crisis.
On Monday, a further wave of dividend suspensions and cancellation of buybacks were announced by companies scrambling to assess the hit to their earnings from the pandemic.
* ITV said scrapping its dividend would save about £300m, and withdrew its guidance because of the drop in advertising spend and halt in production.
* IWG, the shared office provider, will not pay its final dividend and suspended a £100m share buyback as coronavirus forced the closure of properties.
* Fuller’s, the pub company, withdrew its forecast and said it would consider cutting its dividend after the government forced the closure of bars, pubs and restaurants.
* Royal Dutch Shell is to halt its share buyback programme.
* Kingfisher delayed its full-year results following the Financial Conduct Authority request, and said there would be no final dividend.
* Stagecoach said uncertainties caused by the impact of Covid-19 would mean any further dividends this year would be unlikely.
The rout began at pace last week, when groups spanning William Hill and Marks and Spencer heaped further pain on shareholders already suffering losses in their portfolios from the market sell-off.
The pandemic appears set to end the decade-long run of bumper payouts for income-hungry investors. Since the end of the financial crisis, FTSE 100 dividend payments have almost doubled from £46bn in 2009 to about £90bn declared so far for 2019, according to stockbrokers AJ Bell. Special dividends and buybacks have been paid out on top.
Analysts had expected a further 2 per cent increase in dividend payments to £91.5bn, but Russ Mould, investment director at AJ Bell, said this was “starting to look optimistic”.
More than a dozen companies have already cut or suspended payouts in the UK. Many are in consumer-facing industries, such as pub groups Marston’s and Wetherspoons, while the cancellation of sporting events forced William Hill and Playtech to take action.
Housebuilders including Travis Perkins and Crest Nicolson have also cancelled final payouts this year, alongside retailers such as M&S.
Next and National Express are among a second group of companies that are considering reduced shareholder payouts.
Investors are worried that dividend cover from earnings has become overly optimistic given an unprecedented drop in consumer demand across industries, and the knock-on effect on areas such as manufacturing and supply chains.
“With many governments pursuing a ‘close everything down’ strategy, the deterioration in corporate cash flows is growing by the day,” said analysts at Stifel, which warned about the impact on funds and the dividends that they are able to pay.
The FTSE 100 offers a forward yield of 6.5 per cent — an artificially high level, according to investors, that will mean further cuts to come given falling earnings cover as the coronavirus crisis continues.
Many companies now offer yields in the double-digits, but earnings cover stands at about 1.7 times on average across the FTSE 100, which is seen as low by analysts even before earnings come under pressure owing to the coronavirus outbreak.
Trevor Green, head of institutional equities at Aviva Investors, said the stated dividend yield for the FTSE 100 was now “hugely” open to question.
“Some companies have chosen to cut dividends immediately, but others are likely to follow as management will have to balance being loyal to staff and keeping retention rates high with short-term cuts to dividends,” he said.
Often the dividend cut has come with the admission that these companies have started talking to their banks about covenants and drawing down credit facilities as they seek to secure cash and debt positions.
If a well-funded and carefully run retailer such as Next was even thinking of cutting, Mr Mould said, “then frankly pretty much no one is safe, barring maybe the utilities and even there they could be asked to give customers more time to pay their bills”.
He pointed to companies such as cruise ship operator Carnival and ITV, if it faced a prolonged advertising slowdown following cancelled sporting events.
A sustained downturn in economic activity could weigh on commodity prices, and in turn on payouts from groups such as Glencore, while BP and Shell are in focus, given the sharp fall in oil prices.
As well as cutting dividends, companies could also find themselves unable to pay a final dividend if they were forced to delay or suspend their annual meetings.