“14% of UK dividend pool just disappeared”
Commenting on the move by UK banks to suspend or cut dividends, Tilney Investment Management Services managing director Jason Hollands said: “A number of UK business have already announced dividend cuts or suspended them and the entire UK banking sector, responding to a request from the UK Prudential Regulatory Authority, have just collectively agreed not to make any dividend or interim dividend pay-outs in 2020 nor undertake share buybacks in order to preserve capital. This has significant implications: in 2019, UK banks paid out £15.6bn in dividends which represented 14 per cent of the entire UK dividend pool.
“More companies will almost certainly follow with dividend cuts and cancellations. Dividend growth last year was powered by the mining sector and the banks and it was also particularly strong in the tourism and travel sectors. The mining, oil and gas and travel sectors have been amongst the worst hit this year.
“It is worth pointing out that the overall UK dividend pool is highly concentrated around a small number of mega-stocks, with five companies accounting for 34 per cent of all payouts last year. These include oil giants Royal Dutch Shell and BP, whose values have halved as oil prices have tumbled, mining stock Rio Tinto and HSBC Bank who have ceased dividends for 2020.
“Dividend pay-outs are extremely vulnerable in the short term. This will clearly impact those retirees with pensions in drawdown as well as those who top-up income from annuities, defined benefit pensions and the state pension with income from ISAs and shares. This income squeeze will ultimately be temporary and should pass when the pandemic abates and the economy comes through the crisis. Pay-out ratios should normalise in 2021, though some companies may well take the opportunity to lower the bar on target pay-out ratios which have been high.”
FTSE falls following “bear market rally”
The FTSE 100 has fallen in early trading as worries about the impact of coronavirus continue and UK banks announce plans to delay their dividend payments.
As of 08:12, the index was down 3.32 per cent to 5,484 points. This followed a strong session yesterday.
Stephen Innes, chief global markets strategist at AxiCorp, said: “With the phrase ‘bear market rally’ permanently ingrained in everyone one psyche, it's getting more challenging by the hour to keep the glass half full and the rose-tinted glasses-wearing scenario's in play as two of the markets major pressure points are starting to surface.
“The fear of a super spreader in India suggests Asia's worst nightmare may become a reality. The Covid-19 infection curve is steepening in Asia's second-most populous country where containment efforts might have been affected too late to save the day.
“And then the global financial sector was dealt a nasty wallop after shares in HSBC and Standard Chartered plummeted when both banks announced the cancellation of dividends.
“All the while, stock markets are reacting negatively to what now seems to be a likely increase in the duration and breadth of coronavirus lockdowns in the US and elsewhere, which is pointing to a potentially deeper and longer-term hit to economic activity than was anticipated even a week ago.”
60% write-down of Mark Barnett’s unquoted assets branded “a little drastic”
Invesco written down 60 per cent of the unquoted assets in Mark Barnett’s Invesco High Income and Invesco Income funds as the asset management giant sells out of illiquid holdings in its UK equity strategies.
The manager will remove all unquoted holdings from the UK portfolios and reallocate to large- and mid-caps as part of an ongoing review into underlying liquidity. The place of illiquid assets in open-ended funds has come under scrutiny in recent months owing to their role in the collapse of Woodford Investment Management.
Juliet Schooling Latter, research director at Chelsea Financial Services, said: “Invesco’s decision to write down 60 per cent of the illiquid, unquoted stocks in Invesco High Income and Income funds seems a little drastic. In the VCT space, where managers specifically invest in unquoted companies, we have seen write downs of around 5-22 per cent. Invesco’s write down is three to ten times larger and will result in an approximate 5 per cent loss for the funds’ unitholders.
“We understand Invesco’s wish to move away from these assets into more attractive parts of the market, but the amount of write down is unjustified in our view. While there may be investor appetite for the funds to hold fewer unquoted stocks, I would doubt that investors would want this at the cost of a 5 per cent drop in the value of their investments.”