Corporate dividend trends are difficult to identify, with the impact of the coronavirus having led to almost half of FTSE 100 companies cutting or removing their payout but some companies still increasing their shareholder returns.
Thursday was a case in point of how companies are taking different approaches to dividends amid the pandemic.
FTSE 100 chemicals group Johnson Matthey (LON:JMAT), heavily exposed to the auto industry, said it will still pay a final dividend, although cutting it in half as it announced plans to cut around 2,500 jobs over the next three years.
Meanwhile, B&M European Value Retail (LON:BME) upped its final dividend as the discounter, which just missed out on promotion to the blue chip index, reported unusually strong trading had continued during the pandemic.
It’s tempting to see that the trend has swung back in favour of income investors.
Johnson Matthey’s cut means that 48 blue chips have now announced some kind of reduction to or suspension of payments to shareholders, compared to 47 that have kept or increased them since the start of the year.
But dividend payments from the Footsie’s constituents for the past financial year has already been slashed by £9.5 billion or 11%, according to data from AJ Bell.
For the whole of the London market, almost £32bn of dividends have been cut since the start of March as the impact of the coronavirus began to show itself in the UK.
FTSE 100 dividends for this year are forecast to fall by a further £11.8bn or 16%, according to an aggregation of analysts forecasts by AJ Bell, with the total forecast dividends of £63bn for 2020 on course to be the lowest in six years.
Looking forward, 2021 is expected to see London's blue chips pay dividends of £77.4bn, up £14.4bn to 22.9% from this year but still down from the £84.3bn paid for the 2018 financial year.
“Optimists will point to the resilience of dividend payments, as even a total drop of 25% from 2018 to 2020 – providing forecasts for this year prove accurate – could be an awful lot worse under the economic circumstances,” says Russ Mould, AJ Bell’s investment director.
The 47 blue chips keeping up or increased payments points to the resilience of some companies’ financial strength and business models, Mould says, although he notes that some of those declared and paid out for the second half of 2019 before the viral outbreak took hold in the UK, US and Europe - “so their planned payments for the first and second halves of 2020 will be particularly interesting.”
But, there is also a more bearish way to view the numbers, as the recent jobs cuts from the likes of Centrica, BP, Rolls-Royce and IAG could be the early wave ahead of greater redundancies in the summer and autumn as the government furlough and rates support is gradually withdrawn and the unravelling of the lockdown could reveal a slower rebound for the economy than some currently expect.
The corporate dividend forecasts for 2020 could simply be too optimistic, acknowledges Mould.
“A 16% dividend cut for 2020 does not seem much in the context of what the OECD forecasts will be the sharpest global economic downturn for a century.
“In addition, the fact that 48 cuts or deferrals against 47 decisions to hold or increase still translates into a 25%, two-year cut shows that the FTSE 100’s total dividend payment was reliant on a relatively low number of companies whose decisions had a disproportionate influence – the cuts from Shell, HSBC, Lloyds, BT and Imperial Tobacco and the deferral from Glencore had a particularly big impact on the overall forecasts.”
On current expectations, the 10 largest dividends are forecast to generate more than half of the Footsie’s total dividend for 2020, with the top 20 dividend payers contributing around three quarters of the anticipated total.
“Any investor buying UK equities for their yield, either through individual stocks or a tracker fund, needs to make sure they are aware of this concentration risk and carry out detailed research on these 20 names in particular,” says Mould.