Investors in UK equity income funds have benefitted from healthy income levels with attractive total returns and often less volatility. While investors have experienced volatility in capital returns the level of dividends has been steadily rising. However those hoping for another increase in dividends in 2020 may be disappointed as we expect dividend distributions to decline.
As we contemplate the impact coronavirus will have on dividend payments in the UK, it is helpful to look back at the last time dividends were cut. In 2009, the distribution on FTSE All share companies was cut from £61bn to £54bn in 2008, a 13% fall[1]. The majority of the dividend cuts came from the financial sector back then. Those companies with highly levered balance sheets also saw some sizeable cuts.[2]
While we don’t expect history to repeat itself we know it often ‘rhymes’. There are some key similarities between the outlook today and what happened in 2008. A study by Societe General looking at dividends cuts of greater than 10% in 2009 found that the majority (75%) came from companies with weak balance sheets, as defined by a Merton score[3]. We expect that this will again be a major indicator of a company’s ability to pay dividends through the current crisis.
The Coronavirus shutdown will impact all sectors, but the most immediate impact will be on travel & leisure and retail. Another sector which looks at risk is energy, which represents 17% of dividend distributions in the FTSE all share[4]. A sustained period with the oil price at current levels would lead to dividends being reduced. While this may seem daunting we should remember that financials made up nearly a third of FTSE all share dividend payments in 2007[5] and the overall cut was just 13%, with income recovering back to pre-crisis levels within two years.
There is still great uncertainty over the next year but we expect the long-term investor to be able to look back at 2020 with hindsight as a temporary setback in an otherwise positive environment for UK equity income investors.
Emma Mogford, portfolio manager, Newton Investment Management.
[1] Link Group UK Dividend Monitor. Issue 40. Q4 2019.
[2] https://www.telegraph.co.uk/finance/financialcrisis/5348011/2009-dividend-cuts-from-big-companies.html
[3] Source: https://moneyweek.com/389936/are-your-dividends-under-threat
[4] Link Group UK Dividend Monitor. Issue 40. Q4 2019.
[5] Ibid.
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