UK dividend cuts: politicisation and the changing goalposts for income investors

Amidst what has felt at times like an indiscriminate global sell off, the holders of UK PLCs have been bombarded with wide-ranging dividend cuts from across the sectoral spectrum. What the UK banks would do, or be compelled to do, was hotly anticipated.

Then, last week we witnessed an almost unprecedented ramp-up in pressure on the UK banking sector by financial industry regulators¹. In an, arguably, strongly-worded letter from the Prudential Regulatory Authority (PRA) to the Barclays Chief Executive Jes Staley, the regulator directly asked the bank to “cancel payments of any outstanding 2019 dividends” and refrain from paying “any cash bonuses to senior staff”. They also welcomed consideration of suspending all 2020 dividends and share buybacks on ordinary shares and, in a final salvo, warned that they “stand ready to make use of [their] supervisory powers should [your group] not agree to such action”. Pretty punchy stuff and, as we saw in the following days, the banks have come sharply to heel.

What a difference a day makes…

Up until 31 March 2020, the savagery of widespread dividend cuts had been keenly felt by holders of UK PLCs. Cumulative omitted and deferred dividends over the previous fourteen trading days stood at £8.96 billion, of which £7.47 billion was from dividends that had previously been announced.

…one day later, the banks followed

On 1 April 2020, fears of pending bank dividend cuts were realised. The chart below shows the enormous impact as the banks capitulated under the pre-described pressure and removed a massive £15.6 billion from the coffers of UK income investors.

As of 1st April we stood at 132 dividends that had been deferred or cut across the market, however, the rest pale in comparison to the magnitude of the banking sector’s omissions. Simply put, there will be no dividends in 2020 from Barclays, HSBC, Lloyds, RBS and Standard Chartered, despite the sector being the strongest it has been for years.

We can appreciate that, in this nervy time, the failure of a large bank could potentially be terminal for the economy but, given the importance of the banks as a source of income for many in the UK, we also must ask whether the forced suspension has been necessary? Time, of course, will tell. There is a wider debate to be had about whether companies that can afford to pay their dividends should, in what looks like far more difficult times for many corporate balance sheets.

Where does this leave income-hungry investors?

The UK has consistently been something of a mecca for income seekers, and is a market where mega-caps readily throw off cash and CEOs can sometimes lose their jobs if they announce dividends cuts. In a distinctly European twist, it looks like many UK companies will show solidarity with their partners and competitors and unilaterally cut their offerings to shareholders; leaving retail savers and pension pots short, and scrambling to replace lost income.

In the short term, income fund managers will have to reposition towards those companies that are bucking the trend, in an attempt to keep their own distributions on track. Many UK funds have the ability to invest overseas, which should allow some flexibility in seeking out yield. 2020 aside, there will be a keen eye on prospects for 2021. Further out, however, there is swirling debate around what the high-yield companies of the next few years will look like. Amid such a moveable feast, there has been a lot of talk about shifting positioning up the quality spectrum to help secure income profiles, albeit at lower starting yields.

What will be key over the next few months is striking the right balance between those companies with a good chance of maintaining their dividend, those which present valuation opportunities and those that will recover post the crisis and be the high-yielding UK stocks of the future.

¹ Namely, the PRA (Prudential Regulatory Authority) and the FCA (Financial Conduct Authority)


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