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 peoples 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 Englands 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 Read More – Source