MUFG Pension & Market Services
A member of MUFG, a global financial group

UK Dividend Monitor webcast highlights

 August 2020 / Link Group

Catch the highlights from our UK Dividend Monitor webcast to find out what changed in Q2

Listen to the full webcast here

In Q2, a staggering 176 UK companies cancelled their dividends with cuts from 30 more.

Every quarter for the last ten years, the UK Dividend Monitor has tracked the income paid to shareholders by the UK’s listed companies.

In our monitor for Q1 2020 it was no surprise that COVID-19 hugely affected dividends. By April 5, 45 per cent of Britain’s listed companies had already axed their payouts or were certain to.

Q2 saw even more cancellations and cuts – in the words of our own Susan Ring it was a record-breaker by a mile. Headline dividends fell a huge 57.2 per cent, with a 45 per cent drop from the top 100 UK companies.

But how are investors responding to these changes, with dividends becoming arguably their most important source of income? Are they losing confidence, or do they understand that these cuts are often necessary to protect companies and ultimately shareholders themselves?

To find out, we hosted a first-of-its-kind Dividend Monitor webcast with the help of Orient Capital. Susan Ring, CEO of Corporate Markets Link Group EMEA, welcomed our own industry experts, Kit Atkinson, Head of Capital Markets, and Scott Poulier, Client Strategy Director, as well as Mark Baker – Director, Head of Research at Teamspirit who helps us produce the monitor.

How do things look now?

In the webcast, Mark describes Q1’s Dividend Monitor as ‘analytical whack-a-mole’, trying to keep track of fast-moving changes.

In Q1, we predicted that the best-case scenario for 2020 was a 27 per cent reduction in dividends and worst-case would see them halved. Even the best-case would have been ‘one of the worst years ever’. The result was that, one-off payments aside, dividends did halve in Q2.

He compares this to the 2008 financial crash when UK payouts only fell 15 per cent. He also points out that the impact will still be felt well into Q1 2021, a full 12 months after COVID-19 began.

But on a more positive note, companies reacted fast from lessons learnt and will be able restore payouts more quickly, hopefully bouncing back before Q2 next year. We are seeing some payments returning already.

How does the UK compare internationally?

When looking at the rest of the world, Mark says we must ask how severe the outbreak was elsewhere, how regulators reacted and how dividends are timed seasonally.

The UK and Europe seem roughly aligned, seeing big hits. But Asia and the US are some way ahead and aren’t likely to see these sorts of declines this year, though their dip will last longer into 2021 because of the way companies time their dividends.

How have cuts affected investor sentiment?

Kit tells us that, amidst the panic and urgency we experienced in March and April, it seems investors were mostly forgiving. ‘As the fog begins to recede, we’ve already seen some recovery; the main indices have recovered around half of their initial losses.’

Perceptions going forward will be less about cuts and more about how companies use the cash they’ve retained, and how they adapt to the new world.

How have investors responded?

Scott explains that, at Link Group, we’ve seen a reduction in 89 UK dividend payments – but few shareholder or employee-shareholder complaints. This shows they have a good level of understanding and appreciate the broader economic backdrop.

We’ll continue to monitor shareholder engagement while revamping our client surveys to gain valuable intelligence on sentiment and to enhance our own services.

Why were the biggest cuts from the finance sector?

Mark reminds us that, unlike 2008, COVID-19 isn’t a financial crisis.

The impact on the finance sector was mostly because the Bank of England banned banks from payouts, with pressure on insurers to do the same. Mark presumes not all banks would have followed suit if this wasn’t the case.

Kit believes banks were most cautious because they’re the institutions that will drive us out of this recession. They’re preparing capital buffers for the volume of loans they expect to give out, so can’t afford to take chances.

Comparing top 100 and mid-caps

There are major, resilient companies in the UK’s top 100, unlike mid-caps who have less flexible balance sheets. Susan reminds us mid-caps are also more domestic and sensitive to the UK economy.

Many leisure and retail companies sit in the mid-caps – it makes sense that many cancelled payouts. How could they pay dividends when they couldn’t make sales?

Investor behaviour

Scott has seen shareholders and investors take advantage of the UK’s depressed share prices, and an 87 per cent increase in transaction – including an incredible 173 per cent increase in shares acquired and a 258 per cent increase in shares sold in the market.

This shows that not all shareholders waited to see if the equity market would stabilise. It also gives us the chance to support them with their new strategy.

For example, share dealing programmes are an effective way of engaging with shareholders and for them to change their dealings cost-effectively.

In response, Mark suggests shareholders are now more engaged with their holdings. Most private investors have regular direct debits set up to fund their ISAs. This is still true, but on top of that there are periods where there is far more trading activity – and we are in one of those periods in 2020.

What happens next?

The third quarter is another big season for the UK dividend.

We are already quite confident about what 2020 will look like for dividends, and in our most recent report we narrowed our best- to worst-case range to -39 per cent to -43 per cent for the year. By the end of September, Mark predicts we’ll be even more certain of how the rest of 2020 will look.

Kit feels there may be more issues to play out. There’s the possibility of a second spike and we are yet to see if the UK government’s localised approach will work. There’s also the withdrawal of government support to consider; companies’ choices surrounding their employees will be a driver in our recovery.

Are there positives?

Mark forecasts that some changes to dividends are here to stay. The UK has dividend cover below the global average and the pandemic is a chance to almost ‘reset’ payouts. In the past, some companies have been trapped by progressive dividend policies forcing them to give high dividends despite their low profit.

Now, the payout-ratio approach is likely to become more popular as dividends would rise and fall with profits. This is especially true for cyclical companies whose profits depend on the strength of the economy.

Scott adds to this by questioning if SCRIP dividends will return – the process of a new share given to existing shareholders free-of-charge. Whatever happens, we need to remain engaged with shareholders using the right channels.

Looking to the future

Susan rounds up this insightful webcast with a reminder that companies have taken quick action to protect themselves. They have raised new capital, issued bond financing and cut costs. Most will survive and any surplus capital they don’t need will find its way back to shareholders.

We shouldn’t be too depressed about a single year of dividends. 2021 will already see payouts begin to recover, not least because action was taken so swiftly this year. Yes, it could be some years before UK dividends regain previous highs, but with less dependence on a few very large payers, the mix will be healthier.

We will keep watching and reporting in future editions of the UK Dividend Monitor.

Listen to the full webcast here

Download our UK Dividend Monitor Q2 2020 here