Investors in Fang — Facebook, Amazon, Netflix and Google (Alphabet) — and fintech may eschew dividends in favour of capital growth, but most traditional stock market investors like myself ideally look for a combination of both.
For decades, dividend flow has been relied upon by pension funds, institutions, charities, corporate and private investors alike as a “reward” for the risks they take in investing their capital.
Many private investors accumulate and reinvest their dividend income — particularly within the tax-free wrapper of an Isa — with the added benefits of compounding.
It may well be that the cult of the dividend was overdone, that some PLCs paid out more than was commercially sensible, perhaps at the expense of dividend cover which has been falling. However, the arrival of Covid-19 — delivering extraordinary and chilling changes to all our lives — has brought the expected flow of dividends to a shuddering halt.
It now looks likely that the majority of quoted companies will suspend or defer payments, with 2020 turning into a very thin year for dividend receipts.
Now let me be absolutely clear — the survival of companies during this difficult and unprecedented situation is paramount and I have no problem with companies I hold that feel compelled to withhold dividends to achieve this.
In my own portfolio, this includes companies such as Air Partner, which provides air charter services, Appreciate, which sells gift vouchers and experiences, and Vitec, which supplies products to the film and broadcast industries. These sectors are especially tested by the pandemic — although I will retain my investments and hold on for better times.
As a small shareholder, my ire is directed at the boards of companies large and small who can afford to pay all, or at least a proportion, of their intended dividend but have chosen to pass.
What concerns me is the seeming underlying attitude that paying dividends at the present time is somehow antisocial and immoral.
Banks didn’t have a choice — they have been directed by the government to withhold payments, even if they felt confident in their ability to cover them. I feel for small shareholders in banks who have had a miserable time in recent years, now deprived of dividends they might reasonably have expected, given the rebuilding of balance sheets and profitability.
For insurance companies, there has been no such diktat — just a warning to be prudent given the current climate and the likelihood of increased claims. Two insurers I held in my own portfolio have reacted very differently. Full marks to Legal & General, which acknowledged the warning, yet maintained it was confident in its financial strength both to meet obligations and to reward shareholders.
However, a big raspberry for Aviva, which pulled its recommended dividend despite talking positively of its financial strength and solvency. The move was not accompanied by any commensurate salary reductions for either executives or non-executives; just a belated acknowledgment that no bonuses would be paid until the restoration of dividends.
The dividend decision has hardly helped Aviva’s stock market rating. Investors like myself have been badly bruised — I talked previously of “parking” earlier takeover proceeds in Aviva on a 7.5 per cent yield. It turned out to be the most expensive parking ticket in history! I waved goodbye to Aviva and topped up my holding in L&G.
However, the wooden spoon has to go soft-drink maker Nichols for its unexpected decision not to pay a dividend. In the formal announcement to shareholders, the Vimto maker first acknowledged it has £40m in the bank and no debt — four times the cost of the dividend.
Of course I accept that the company faces a very difficult trading period during lockdown — this week, even the mighty Coca-Cola revealed that sales volumes had fallen 25 per cent this month.
Yet John Nichols, non-executive chair, proudly stated that the group’s “robust balance sheet and diversified business model” meant the board remained “absolutely confident” that it could manage the near-term pressures and “continue to deliver long-term growth plans”.
So, how does that square with no dividend? I have been a long-term Nichols shareholder for many years, but they have got this wrong.
My contention is that companies who can afford to keep paying dividends should do so — even if they perhaps pay only half initially and defer the balance.
We should not lose sight of the fact that many thousands of shareholders rely on dividend income to sustain them in retirement, or perhaps to pay care home fees.
Charities are also being hit with the double whammy of both dividend reduction and an inability to maintain their normal fundraising events and activities.
Sometimes, I feel that directors — particularly non-executive directors — forget that it is actually we shareholders who own the company.
The personal holdings of most NEDs are derisory in the extreme — some rather sanctimoniously saying that having a near zero shareholding gives them greater independence of view and opinion. Frankly, this cuts no ice with me.
I believe that after a couple of years on a PLC board, non-executive directors should have acquired a shareholding broadly equivalent to their annual director’s fee. Failure to do so questions their belief and commitment in the company and they should depart.
Similarly, I would like to see chief executives reinvest more of their generous remuneration packages in increasing their own shareholdings rather than relying on share options to incentivise their performance.
When we come out of lockdown — through this horrible period of restriction, misery, and in many cases sadly death — economic life will resume.
Dividends are also likely to flow again — indeed, Aviva has said it will consider a payment in the last quarter of 2020 and hopefully Nichols will pay something later this year.
However, my forecast is that dividend levels will not be fully restored, but rebuilt gradually. This means that for a considerable time to come, we will have to live with a lower level of dividend income in spite of the investment risk we continue to take. A dividend passes leaves a scar on a company’s record that can never be erased and investors have long memories.
Lord Lee of Trafford is an active private investor and author of “Yummi Yoghurt — A First Taste of Stock Market Investment”. He is a shareholder in all the companies indicated.
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