22 July 2020

A Dividend Drought

It’s not just Rishi Sunak that’s dishing out the cash. Stimulation packages are arriving thick and fast.


We learned recently that the European Union had agreed a €750bn recovery fund, part loans, part grants, to help those countries worst hit by the pandemic get back on to their feet. The summit at which this particular deal was put together was lengthy and, by all accounts, quite bad tempered at times. But it is significant enough to be described as pivotal by EU leaders.

Certainly, it did European bourses no harm, with shares rising across the board in trading immediately after the measures were announced. Our own stock market also benefitted, though it is worth noting that we have been lagging our peers in Europe and America since this crisis erupted. Perhaps that is down in some measure to the way in which domestic companies have been cutting dividends.

According to figures published by Link Asset Services, which publishes a quarterly dividend monitor, the income paid out to shareholders in the second quarter of this year fell by a massive 57%. Banks made significant reductions, though the range of companies that cancelled or reduced their dividends ranged far and wide. Even oil giant Shell felt obliged to cut its payout as a consequence of the dip in the oil price – the first such move since the Second World War. In total some 176 companies chose to cancel their dividends, a staggering amount.

Dividends are, of course, an important component in the returns expected by investors. While an economic recovery could see some cuts restored, it seems likely that the payout ratio for this year will be significantly lower than in the past. Pension funds and insurance companies are likely to suffer as a result, as will those who rely on their dividends to supplement their income. How long this will last is uncertain, but in the short term the effects could be quite dramatic.

Of course, these moves have been prompted by the Chancellor of the Exchequer who clearly feels shareholders should play their part in bearing the cost of the pandemic. In some areas, such as banks, this is understandable as they are crucial to the financing of businesses during the current recession. Still, this represents an unwelcome development in this complex and difficult situation we all find ourselves in. It looks as though businesses and individuals will be relying on government help for some time to come.


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