BP last cut its dividend in 2010 after the Deepwater Horizon disaster. The energy group’s announcement on Tuesday that it would halve its payout for the second quarter is symptomatic of the far deeper and wider coronavirus catastrophe. Two days later, another FTSE 100 constituent Glencore, the commodities company, scrapped its 2020 dividend altogether. The implications are significant — and perhaps salutary — for investors and companies.
Janus Henderson now forecasts a drop in underlying dividends paid globally in 2020 of between 19 and 25 per cent. In the UK, whose large listed companies are historically generous dividend-payers, the worst-case scenario envisages a slide of 42 per cent this year, according to the next edition of the fund manager’s quarterly Dividend Index, published later this month.
Cynics will say lazy rentier capitalists are finally getting their comeuppance. The reality, though, is that this income is the sustaining lifeblood of pension funds, charities and foundations. It has grown all the more precious as bond yields have declined in recent years. Cuts from trusted dividend sources — including the first since the second world war by BP’s rival Royal Dutch Shell, the world’s biggest payer — have driven many equity income funds to seek healthy returns from unhealthy sources such as tobacco companies.
The trigger for companies’ retreat from dividends was unexpected, and the cuts in some cases were involuntary. Banks, for example, are bound by temporary regulatory restrictions on their generosity to shareholders. But the reset was overdue. Global payouts hit a record in the first quarter, before Covid-19 struck. Dividend cover, the ratio of earnings to dividends, had worn thin in many economies. Companies now need to rethink how they allocate resources as they insulate balance sheets and strengthen supply chains in case the pandemic surges again.
For investors, this is a reminder not to take the predictability of income from riskier equities for granted. The spate of cuts has exposed anyone with an over-reliance on particular countries or industries. The UK alone accounted for 8 per cent of payouts globally in 2019. Sectors vulnerable to cuts — financials, energy, consumer discretionary products — paid out nearly half of all dividends worldwide. Yet there are still equity income opportunities elsewhere.
Now shareholders have a chance to discriminate between companies that have merely paused payouts and those unlikely to restore dividends to prior levels. The crisis should also redirect investors to the source of their income — sustainable earnings. It has exposed companies that underinvested in order to pay lavish dividends and, in the US particularly, to launch aggressive share repurchase schemes. Investors should look for companies that are ploughing savings from dividend and buyback cuts into long-term growth and put pressure on those using the crisis as an excuse to hoard excessive cash.
As the dust settles, companies will again want to use dividends to signal the worst has passed. Janus Henderson is less gloomy than in May, when it suggested global dividends could fall by up to 35 per cent this year. Three FTSE 100 companies — Land Securities, Smurfit Kappa and BAE Systems — have in recent weeks announced plans to restart dividend payouts.
The mutual benefit of a healthy dividend policy ought to be clear. Shareholders could simply enjoy the income stream. But they can also redirect it from companies that can afford to pay, to those deserving but financially stretched enterprises that, for now at least, cannot.
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