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More than half of UK dividends could be axed in Link’s “worst case scenario”

09 April 2020

The latest Link UK Dividend Monitor has mapped out how continued cancellations of UK dividends could affect the market.

By Gary Jackson,

Editor, Trustnet

The UK’s dividend pool could be cut in half this year in a worst case scenario as companies cancel or postpone their payouts in the wake of the coronavirus crisis, a closely watched report has warned.

Recent weeks have already seen a raft of UK companies scrap their dividends to shareholders, including InterContinental Hotels Group, Glencore, Lloyds, Royal Bank of Scotland, HSBC, Rolls-Royce and Aviva. By 8 April, 45 per cent of UK-listed businesses had said their dividends will be cancelled or postponed in 2020 as they wrestle with the impact that coronavirus and its economic fallout will have on their finances.

Link Group, which publishes the UK Dividend Monitor, said these cuts affect more than one-third of the dividends it had previously expected UK companies to pay over the rest of 2020 – a “staggering” £28.2bn of cuts between now and the end of December this year.

In addition, the group thinks another £23.9bn in dividends are ‘at risk’, which is equivalent to 29 per cent of 2020’s April-December payouts. Half of these are paid by the oil sector, which has been hit by the Saudi Arabia/Russia oil price war.

“We have canvassed a number of fund managers and analysts and they are split down the middle on the likelihood the oil majors will cut. We note that Shell, the largest dividend payer in the world, has not cut its dividend since the second world war and has arranged finance to fund its dividend this year,” Link added.

“So even if the oil sector does succumb, which is far from certain, we do not think outright cancellation is at all likely. At worst, we could simply see a reduction and a potential reset at a lower level – this is actually likely for many companies. Another alternative likely to make a comeback is the scrip dividend, which provides new shares in lieu of cash. The ‘at risk’ groups should not therefore be considered at all likely to fall to zero.”

This leaves just £29.6bn of the UK dividend pool being considered ‘safe’.

UK dividends (full-year basis)


Source: Link UK Dividend Monitor Q1 2020

In the latest edition of the Link UK Dividend Monitor, the group outlined four scenarios that income investors could have to contend with in 2020 (acknowledging that £17.5bn was already paid out in the first quarter). The best and worst cases are reflected in the above chart, which shows total UK dividend payouts by calendar year.

The best case scenario is if only the confirmed and expected dividend cancellations come to pass. Under this scenario, total dividend paid during 2020 would amount to £70.4bn, which is a 29 per cent decline on the £98.5bn paid out in 2019.

The worst case scenario, on the other hand, assumes that all of the ‘at risk’ dividends are cancelled as well. Here, just £46.5bn would be paid out – less than half of last year’s level.

A third scenario – realistic upper bound – has the “crucial” oil sector continuing with its planned dividends but half of the ‘at risk’ payouts are scrapped. Dividends drop 33 per cent here, to £65.8bn.

Finally, a realistic lower bound scenario sees half of the ‘at risk’ payouts including the oil sector cancelled, which causes total payouts to drop 41per cent to £58.4bn.

UK stock market yield under the four scenarios


Source: Link UK Dividend Monitor Q1 2020

How will this affect yields? After all, yield is one of the most used metrics when assessing the relative value of a market.

Under Link’s best case scenario, UK shares will yield 3.9 per cent in 2020, which it said is “attractively above” the 3.5 per cent average for the past 30 years. The worst case scenario puts yields at a “disappointing” 2 per cent – which would be around the lows seen the dotcom boom – while the upper bound realistic scenario puts it in line with the long-run average at 3.5 per cent.

“These scenarios suggest the UK market is either: a little undervalued and so could rise, fairly valued, or rather overvalued and so could fall. Not very helpful,” Link added.

“It is therefore important to look beyond the next 12 months, given that this is such an unusual year. We have made some broad-brush assumptions about what 2021 might look like. If we imagine the banks return payouts to near full strength next year, and half of all the other cancelled dividends are restored, then a more realistic best case yield is 4.8 per cent, suggesting the market is severely undervalued at the moment and so presents a good buying opportunity. Our worst case for 2021 suggests the market is now fairly valued.”

Dividend cut risk by industry


Source: Link UK Dividend Monitor Q1 2020

The research also looked into the impact of the coronavirus crisis by UK sector. In value terms, the biggest confirmed impact comes from the banks, which have slashed £13.6bn off this year’s total. The next largest comes from the mining sector, mainly Glencore.

As can be seen, the safest sectors are considered include food, drink & tobacco, utilities, food retailers, healthcare and basic consumer goods. These are all the classic defensive sectors, which have already seen an uptick in demand for their goods and services during the pandemic.

UK dividend risk (in £m, by industry)


Source: Link UK Dividend Monitor Q1 2020

Kit Atkinson, head of capital markets for corporate markets EMEA at Link Group, concluded: “Even as we face the deepest recession since the second world war, investors can take comfort from the knowledge that tens of billions of pounds of dividends will still be paid this year. More importantly, they will bounce back next year, even under quite bearish scenarios. Dividends really matter – not only do they provide income for pensioners and many other types of investor, but they also underpin share price valuations.

“Some of the cancellations for this year are very necessary to protect companies – investors have responded well on the whole. For many, public relations are playing a role. Any company taking public money in one of the support schemes, either via government-backed loans or via taxpayer-funded salaries for furloughed workers would naturally face a public outcry if it continued payouts to shareholders. The banks are in a separate group. They are very well cushioned by strong balance sheets and could afford to pay dividends. But political influence has been brought to bear, and the banks have demurred for now.

“We have no crystal ball but news flow is sure to get worse before it gets better. The exceptional uncertainty explains why stock markets have fallen so far, so fast. Stock markets always try to get ahead of events and they are already pricing in a lot of bad news. If the damage to the economy truly can be limited by government action and if the economy can escape the prospect of a protracted depression, it’s clear markets can recover sooner and further. If the news turns out to be worse, they could decline further.”

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