The Week: UK dividends – reasons to be cheerful?

It’s been a torrid time for UK income investors, but there may be reasons for cheer amid the gloom.

  • Payouts fell more in the second quarter than at any point on record 
  • Not all companies have cut because of significant financial distress
  • At the margins, dividends are already being reinstated 

The latest statistics on UK dividends make for grim reading: payouts fell by a savage 57.2% in the quarter to June to just £16.1bn. 206 companies either cancelled or cut their dividends, around three-quarters of those who normally pay dividends at this time of year. Overall, 2020 is likely to see dividends fall by over £60bn (source: Link Asset Services). 

This is unprecedented in history. During the financial crisis, the worst quarter (Q1 2009) saw two fifths of companies cut their dividends. Even then, only half of these cancelled them altogether. In this quarter, around 85% cancelled payouts. The UK market has been seen as one of the most resilient dividend markets in the world. No longer. 

Amid all this gloom, however, there is some consolation. In the second quarter, over half of the dividend cuts came from the financial sector. The Bank of England forced the banks to cancel all shareholder payouts for 2020 and pushed insurance companies to follow suit. In this case, dividends have not necessarily been cut because businesses are under strain. 

This was one of four reasons identified by Guinness Asset Management for cutting dividends. It points out that there are many companies that have cut dividends as a precautionary measure to shore up liquidity at an extremely uncertain point. Equally some companies have cut for ‘political’ reasons: companies that had furloughed workers, for example, didn’t want to be seen to pay dividends. Companies cutting because of significant financial stress are only part of the picture. 

Equally, those that have cut because of financial stress are concentrated in specific sectors. A significant proportion is from the oil sector, for example. Shell’s cut, along with smaller oil companies, made up £2.2bn of the fall in dividends. Retail and travel companies have also suffered. 

This bodes well for a recovery in dividends in the second half of the year. At the margins, dividends are already being reinstated as the earnings outlook becomes clearer. Land Securities, for example, has said it will resume payouts from November. Earnings season is starting in earnest and the picture for dividends should become clearer from here. 

This has been the worst period for dividends on record and it has undoubtedly exposed the vulnerability of some groups’ payout strategies. However, the worst may well be over already.