UK Dividend Monitor Q2 2020

Insights - Publications

  • Covid-19 caused unprecedented cuts in dividends in Q2 2020, down £22bn on a headline basis; they fell £16.4bn on an underlying basis (i.e. if special dividends are excluded)
  • 176 companies cancelled payouts and 30 more cut them, together representing three quarters of Q2 payers
  • In the aftermath of the Global Financial Crisis (GFC), just two fifths of companies cut or cancelled payouts
  • Dividends fell 57.2% to £16.1bn on a headline basis, or 50.2% to £16.0bn if special dividends are excluded
  • Top 100 payouts fell 45% in Q2 compared to 76% for the mid-caps
  • Best-case scenario implies equities will yield 3.6% in the next twelve months; worst case is 3.3%
  • 2020 will see payouts fall at best 39% to £60.5bn on an underlying basis, or 45% in headline terms (which includes special dividends)
  • At worst they will fall off 43% to £56.3bn on an underlying basis, or 49% on a headline basis

As the Covid-19 pandemic sent the world into lockdown UK companies slashed payouts with unprecedented speed and ferocity, according to the latest Dividend Monitor from global financial administrators Link Group. 176 companies cancelled their dividends altogether and another 30 cut them – together these made up three quarters of all the companies that usually pay in the second quarter. Just 61 increased their payouts. In the aftermath of the global financial crisis, which used to be the benchmark for ‘how bad things can get’, the worst quarter (Q1 2009) saw two fifths of companies cut their dividends, and only half of these (i.e. one fifth) cancelling them altogether.

The Q2 2020 total fell by a dizzying 57.2% to £16.1bn, almost £22bn less than in Q2 2019 on a headline basis. Excluding special dividends, which were exceptionally high this time last year, the decline was 50.2%, from £32.1bn to £16.0bn. This was the lowest second-quarter total since 2010, and the decline itself is by far the biggest ever recorded. Not surprisingly discretionary special dividends have all but disappeared.
 
Of the £16.4bn of cuts in underlying (i.e. ex special dividends) in the second quarter, half of the impact came from the financial sector, after the Bank of England commanded the banks to cancel all shareholder payouts for 2020 and leant heavily on insurance companies to follow suit. Some insurers resisted, notably Legal & General and Admiral (though the latter canned its planned special dividend), but most bowed to pressure from the regulator.

The biggest news came when Shell took a knife to its world-beating payout, cutting it by two thirds, the first reduction it has made since the Second World War. Collectively, oil-sector cuts totalled £2.2bn in the second quarter. Almost as much, £2.0bn, came from the diverse industrials sector which includes aviation, construction, engineering, and support services. Nine in ten companies cancelled their dividends altogether. £1.7bn fell away from consumer discretionary sectors that include media, housebuilding, travel, leisure, and retail – the last four of these especially badly hit by the lockdown. Only four companies out of 55 did not cancel their Q2 payout, most of them media groups such as Pearson.

Among consumer basics companies that include food retail, food, drink and tobacco, and personal items, dividend cuts were less severe than elsewhere. These sectors are classic defensives, whose earnings are relatively sheltered during a crisis. More than half the companies in the sector actually increased their payouts year-on-year.

Top 100 dividends dropped by less than the mid-caps, falling 45% year-on-year compared to a precipitous 76% for the mid 250 on an underlying basis. Overall, three fifths of top 100 companies cut or cancelled their payouts in Q2, compared to almost four fifths of mid 250s. 

Link Group’s best-case scenario for 2020 now sees payouts falling 39% to £60.5bn on an underlying basis, down from £98.5bn last year. One-off special dividends were exceptionally high in 2019 and will be exceptionally low this year, so the decline in the headline figure will be 45% on a best-case basis, dropping from £110.5bn to £61.6bn. Link’s worst case sees a fall of 43% to £56.3bn on an underlying basis or 49% on a headline basis to £56.7bn. 
 
Over the next twelve months Link Group now expects UK equities to yield 3.6% on a best-case scenario (in line with the long run average of 3.5%) or 3.3% on a worst-case scenario.

Susan Ring, CEO Corporate Markets of Link Group 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. 

'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. The gap between our best- and worst-case scenario is now just four percentage points, far narrower than our first estimate made in early April in the midst of the turmoil.

'The cuts have been made to protect balance sheets in the face of horrendous disruption to trading and to the economy. But to some extent, companies in 2020 are also ensuring they try to make good use of a crisis. Dividend cover, a measure of affordability that relates payouts to profits, has been far lower in the UK than the global average. 2020 has provided an opportunity for many companies to reset their dividends at a lower, more sustainable level from which they can again start to rebuild. In the short term this is painful for investors, but in the long run it helps create healthier companies.

'This resetting, together with the economic legacy of the pandemic, means it could take until 2026 for dividends to return to their 2019 level.'

Kit Atkinson

Head of Capital Markets

Tel: +44 (0)20 7954 9521

kit.atkinson@linkgroup.co.uk

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