Shell had the cash flow to cover payments but chose to prioritise caution
Shell had the cash flow to cover payments but chose to prioritise caution © AFP via Getty Images

UK dividend cult members are being deprogrammed this year whether they like it or not. At the start of 2020 shareholders expected payouts to match last year’s near-£100bn. Coronavirus has nixed that. More than 300 listed companies have cut or cancelled payouts, according to AJ Bell. That figure includes Royal Dutch Shell, the largest payer of them all.

How far payouts fall depends on the duration of the virus and the speed of economic recovery. Forecasts are gloomy. Dividend payers are tightly concentrated in the UK; the actions of a handful of companies determine more than a third of total payouts. Link Group, author of the UK Dividend Monitor, expects a 29 per cent fall in its best-case scenario and a 53 per cent drop in its worst. There is little point hoping for a special dividend to make up the losses at the end of the year. The Bank of England expects UK output to drop a further 25 per cent in the second quarter.

The repercussions go beyond 2020. Cash previously earmarked for shareholders will need to go towards servicing and repaying new debt taken on by struggling businesses. It could also change the mix of shareholders in certain companies targeted by income-focused investors.

Those investors must take comfort that not every dividend cut, suspension or withdrawal is the same. Companies in the retail, travel and leisure industries have had their finances eviscerated. Others, including Shell, had the cash flow to cover payments but chose to prioritise caution. Banks and insurance companies had suspensions imposed upon them. Companies including Direct Line and HSBC are expected to restore dividends as soon as these regulatory restrictions end.

Still, the sweeping dividend reduction offers the option for companies such as Shell to unshackle themselves from expensive payouts. If profits recover they will have to choose between reinstating dividends at their previous elevated levels and focusing on longer-term plans via acquisitions or bigger cash buffers. Income investors will squeal but companies may relish the chance for a reset.

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