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Dividends slashed but is the market more resilient than it seems?

16 June 2020

Nearly half of all FTSE 100 firms have cut their dividends, costing investors millions of pounds, but are company payments more resilient than they seem? 

Chemicals group Johnson Matthey became the latest bluechip to cut its dividend, meaning 48 FTSE 100 firms have now announced a reduction to or suspension of payments to shareholders.

Johnson Matthey’s announcement ends a streak of increases that dates back to the late 1980s and follows cuts by household names including HSBC, Shell, Barclays and BT.

According to AJ Bell, FTSE 100 dividend payments for the 2019 trading year are set to drop by £9.5 billion, or 11%, in a blow to investors and pensioners who rely on dividend payments.

Five FTSE 100 firms – Ashtead, Auto Trader, DS Smith, Halma and National Grid – have yet to make a definitive statement on their intentions, but analysts believe that total dividend payments from the leading index will drop by a further 16% in 2020. That would take the FTSE 100’s total dividend payment down to £63 billion, the lowest figure since 2015.

Russ Mould, investment director, AJ Bell, said: “This can be seen two ways. 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.

“Forty-seven ongoing or increased payments point to the resilience of some companies’ financial strength and business models – although some of those declared and paid out for the second half of 2019 before the viral outbreak took hold in the West, so their planned payments for the first and second halves of 2020 will be particularly interesting.

“The more bearish view is that the forecasts for 2020 are simply too optimistic. 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.”

According to Mould, the fact that 48 cuts or deferrals against 47 decisions to hold or increase dividends 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.”

Currently, the 10 biggest players are expected to generate 54% of total dividends in 2020 and the top 20 as much as 73% of the forecast total.

Mould warned that investors should be aware of the concentration risk and carry out detailed research on these 20 names in particular, as well as consider the forecast pay-out ratio and earnings cover.

Mould added: “The forecast pay-out ratio of 69% is high and its mathematical obverse – earnings cover for the dividend – is lower than ideal at 1.44 times. The ideal is a pay-out ratio of 50% for earnings cover of 2.00 times. A longer-than-expected economic downturn could therefore place further pressure on dividend payments as profits and cash flows are squeezed further.

“High pay-out ratios and low cover are particularly noticeable at the highest yielders, even if some allowances can be made for the relative stability of some firms’ business models or the solidity of their cash flows and balance sheets.”

Professional Paraplanner