British companies cut payouts to shareholders by £22bn last quarter as they raced to shore up their finances in the face of the economic crash caused by the pandemic.
In total, only £16.1bn of dividends were paid in the second quarter this year, with 176 companies cancelling payouts and 30 more cutting them back — representing about three quarters of companies that normally pay a dividend in the period.
This was significantly more than during the last financial crisis, when two-fifths of companies cut or cancelled payouts at the worst point, according to a report by Link Group, an investor services business.
It is the lowest quarterly dividend figure since 2010 and a 57 per cent drop compared to the second quarter last year.
Link forecasts that underlying payouts — after one-off dividends are stripped out — will fall at least 39 per cent to £60.5bn this year or at worst by 43 per cent to £56.3bn. This would be a record drop in the income that investors have come to expect from their stakes in the UK’s biggest listed companies in the FTSE 350 index. Last year, investors were paid £98.5bn in dividends by FTSE 350 companies.
While many big investors have publicly said they support companies reducing dividends, the large scale cuts have hit investment returns and worried many portfolio managers.
One big UK investor said that while some businesses had little choice but to cut dividends, the case was not as clear for others.
“We understand [companies] are being cautious, but why not reduce the dividend? Why cut it completely? To go from all out to nothing overnight raises lots of questions.”
Another big asset manager said: “Investors will have to think harder about what they expect in returns.”
Under Link’s best-case scenario, UK equities will yield 3.6 per cent in the next 12 months and 3.3 per cent in the worst case.
Susan Ring, corporate markets chief executive of Link, said: “The second quarter was truly a record breaker, not by a whisker, nor by a nose, but by a mile. The whole of 2020 will, without doubt, see the biggest hit to dividends in generations.”
Link data shows that 61 companies that were less affected or fared well during the pandemic managed to increase their payouts in the second quarter.
Half of the £16.4bn of cuts in underlying dividends were in the financial sector: banks were ordered by regulators to cancel dividends for the year and many insurance companies followed suit.
In the FTSE 100 index of the biggest companies, which also has a much higher proportion of businesses that generate significant revenues overseas, payouts fell by 45 per cent year-on-year, compared with 76 per cent for the more domestically focused mid-cap FTSE 250.
“As the lockdown wore on and restrictions became ever tighter, the economic damage spread to more and more companies. At the same time, it became clearer which companies were more resilient, and we were able to assess more accurately how deep cuts would go for those companies not simply cancelling payouts altogether,” said Ms Ring.
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