Most clients and investors are feeling a little more sanguine about the value of their portfolios, ISAs and Pensions since the depth of the market retreat in March. This of course is despite the pandemic still being a deadly threat and yet to reach its peak in many parts of the world, never mind the ever-present threat of a ‘second wave’.
Whilst the value of most investment assets has recovered to a greater or lesser degree, income generation, particularly from equities, remains a major issue. We warned in March, as did many others, that dividends would take a hit. So how bad has it been so far?
In the UK, the last quarter has been very difficult. At headline level, dividends from FTSE 100 companies fell 45%. Even worse, UK ‘mid-cap’ companies listed on the FTSE 250 which tend to be more UK-orientated saw aggregate dividends cut by 76%.
Of course, this is a recession like no other and some companies with perfectly good operating models ‘in normal times’ have been forced to shut down all or part of their businesses and focus on cash-preservation. In such circumstances paying a dividend is not an option in the short term.
The figures are also distorted by the (temporary) disappearance of ‘Special’ Dividend payments – one off’s when a company has excess cash perhaps from the sale of non-core business and returns the funds to shareholders. There is precious little of that going on!
Banks and other financial institutions were leaned upon heavily early in the crisis by the Bank of England. Portrayed as part of the solution, not the problem as in 2008, Banks were effectively required to bolster their balance sheets by not paying dividends to ensure that credit continued to flow to the wider economy. They should emerge in a stronger position and able to resume payments in 2021.
There have been bright spots. Glaxo and Astra Zeneca, the two largest UK-quoted pharmaceutical stocks have maintained what were already high yielding dividends. Not one for the ESG portfolios, but tobacco giant, BAT, increased its payment by 5%.
Dividends matter to all investors. Some rely on the income, whilst others reinvest it within their portfolios. Long term performance can be enhanced significantly by this compounding effect. Not all clients invest for income, but all benefit from it.
We are not out of the woods yet but the economy, in the UK and overseas, is showing tentative signs of recovery. That said, we are not predicting a quick bounce to previous levels of equity dividends. Some large payers, notably the Oil majors, Royal Dutch Shell and BP, are very likely to take the opportunity to ‘re-base’ their dividend payments to a more sustainable level. They are big players in the equity income arena.
But there will be a pick-up next year, barring a major second outbreak of COVID. In the meantime, the importance of a diversified portfolio, once again has shone through. UK equities in aggregate have yielded more than fixed income markets over the last eleven years of negligible interest rates. But there is a greater risk to income as well as capital. As previously reported upon, corporate bonds and Infrastructure investments in general have fared rather better than the higher yielding UK equity markets so far in 2020.
Please continue to stay safe.