© Bloomberg, FT montage

Royal Dutch Shell’s decision to cut its dividend for the first time since the second world war brought fresh woe to income investors on Thursday, as one of the UK’s top payers followed nearly half of UK companies in cancelling or reducing payouts.

The energy company cut its interim dividend by two-thirds from 47 cents per share to 16 cents per share, after interim revenue in the company fell by more than 28 per cent in the first quarter. Oil prices have collapsed and demand has flatlined during the coronavirus pandemic.

Investors have watched income from their assets dry up in recent weeks as companies have slashed or limited dividends.

“Shell has administered a bitter pill to investors,” said Kit Atkinson, Europe head of capital markets at Link Group. “A two-thirds cut in its dividend . . . is not surgical precision, it’s amputation.”

Shell is a top 10 holding in almost two-thirds of funds in the UK equity income sector, which has become increasingly concentrated on traditionally high-paying companies, according to research by investment platform Octopus. 

Nicholas Hyett, equity analyst at investment platform Hargreaves Lansdown, said the company’s move would be “very unwelcome” for income investors. “In other markets [Shell’s decision] would probably define the first half of the year,” he said.

Mr Hyett noted that Shell’s dividend, of which it is particularly proud, had become a burden for the company, requiring the sale of assets and cuts to future investment to service it. “Both Shell and BP have been slowly digesting themselves to keep the dividend ticking over. Removing that pressure allows the group to focus on the future.”

This week alone more than £4.6bn in dividends has been cut by UK companies, as companies look to shore up their balance sheets against an uncertain financial future. Fewer than half left their dividends untouched, and only £3.5bn in dividends were confirmed, according to data from investment platform AJ Bell.

In a big week for trading updates, the five largest dividend payers were among the 20 per cent of the FTSE 100 to announce results. Investors had reasons for optimism earlier in the week: the UK’s largest dividend payer, BP, said on Tuesday it would maintain its dividend, despite a two-thirds tumble in profits.

“April overall has been much kinder to income-seekers than March,” said Russ Mould, investment director at AJ Bell. Firms committed during the month to retaining £8.9bn in dividend payments, which, until Shell’s announcement, almost kept pace with the £10.4bn that were cut.

In March, only £1bn in dividends were confirmed, while £15.4bn were deferred, suspended or cancelled. Dividend cuts of £10bn were made in the last week of March alone.

“Dividend cuts and postponements have raised concerns among investors globally, especially those focused on income strategies,” said Matthew Jennings, investment director at Fidelity International. The firm predicts dividend cuts in the current downturn will be more than double those seen during the 2008 financial crisis. “But not all dividend cuts are created equal.”

More than 66 per cent of projected dividends in the UK are paid out by just 10 companies. BP alone is expected to account for 10 per cent of annual dividends, according to Sharecast analysis. HSBC, the fourth largest payer in 2019, making up 6.3 per cent of the UK’s dividends, has already cancelled its payout.

More than 40 per cent of British companies have already cut their dividends this year, a loss of £28.2bn. That figure could yet rise to 53 per cent or £52bn, according Link Group’s UK Dividend Monitor report.

Dividend cuts have been deep and wide-ranging, as companies hit hard by the pandemic try to survive and others bow to regulatory pressure to hold on to cash. In April, banks and several of the largest insurers in the UK cancelled their dividends.

Even companies that posted profits over the quarter, such as supermarket group J Sainsbury, have cut dividends this week, citing the uncertain economic outlook and a desire to shore up their balance sheets. Grocery sales were up at the retailer, but it said it had seen a sharp drop in non-food and fuel sales. Marks and Spencer warned on Tuesday that it, too, is unlikely to pay a dividend this year. The company will report full-year results on May 20.

St James’s Place, the wealth manager, cut its dividend by one-third on Thursday, but said it will evaluate later in the year whether to pay the full amount back to investors. It was joined by fashion retailer Next, which opted to hang on to its £223m in cash rather than pay out to investors.

In the US, carmakers GM and Ford both suspended their dividends. Motorcycle maker Harley-Davidson halved its dividend on Tuesday.

As dividend cuts become the norm, investors are wondering which companies will continue to pay out this year.

GlaxoSmithKline, the pharmaceuticals company that is the UK’s fifth largest dividend payer, said it intended to pay out £543m in dividends, at 19p per share for the quarter, but warned on Wednesday of substantial risks to its manufacturing operations and supply chain posed by the pandemic.

British American Tobacco, the UK’s third largest dividend payer, said it planned to increase its dividend by 3.5 per cent in line with its payout ratio of 65 per cent of adjusted diluted earnings per share and growth, but noted that company growth would be muted as a result of the pandemic.

Prudential held its dividend, while Admiral kept its dividend but cancelled its special dividend.

Get alerts on Personal Finance when a new story is published

Copyright The Financial Times Limited 2020. All rights reserved.
Reuse this content (opens in new window)

Follow the topics in this article