Hopes that a nascent economic recovery could lead to a renaissance for UK dividends were dealt a blow at the end of October as the Government implemented further lockdown measures in a bid to stem the spread of Covid-19 infection.
- UK equity prices fell in October
- UK dividends fell by 49.1% in Q3
- Payouts from defensive sectors held up relatively well
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Hopes that a nascent economic recovery could lead to a renaissance for UK dividends were dealt a blow at the end of October as the Government implemented further lockdown measures in a bid to stem the spread of Covid-19 infection. The news that “non-essential” shops, leisure and hospitality venues were set to close until early December triggered widespread concern about the impact on the UK economic recovery alongside fears for the future of the individual companies affected.
“Two-thirds of companies cut or scrapped their dividend payouts in the third quarter”
The FTSE 100 Index fell by 4.9% during October, and the FTSE 250 Index declined by 0.6%. The yield on the FTSE 100 Index rose slightly from 4.72% to 4.73% in October, while the FTSE 250 Index’s yield eased from 3.76% to 3.55% over the month. In comparison, the yield on the benchmark UK gilt edged up from 0.23% to 0.26% during October.
Having dropped by 57.2% in the second quarter of 2020, UK dividends fell by 49.1% to £18 billion between July and September, posting their lowest third-quarter total since 2010. On an underlying basis, payouts fell by 45.1% to £17.7 billion. According to Link Asset Services’ quarterly Dividend Monitor, two-thirds of companies cut or scrapped their dividend payouts in the third quarter, compared with the three-quarters that did so in the second quarter. Dividend cuts were particularly prevalent in the banking, oil, and mining sectors; in comparison, only two sectors – the “classically defensive” food retailers and basic consumer goods – grew their dividends on an annualised basis. Some companies reinstated their payouts during the third quarter, but Link warned that “huge uncertainty” remains, with “a long road ahead before dividends return to pre-pandemic levels”.
Although BP posted a profit in the third quarter, the company warned that the pandemic is likely to continue to affect demand for oil. Nevertheless, BP reiterated its commitment to its dividend payout: Chief Executive Bernard Looney stated: “We are firmly committed to our updated financial frame, including the dividend – the first call on our funds”, while the company’s Chief Financial Officer commented: “Funding the dividend remains our first priority”. Elsewhere, Tesco announced a 21% increase in its interim dividend payout following a 29% rise in pre-tax profits, and housebuilder Bellway reinstated its dividend payment, boosted by Government stimulus measures including the “Help to Buy” scheme and the stamp duty holiday.