Income investors face a “leaner year” amid further dividend cuts for UK-listed firms, with structural and macroeconomic pressures forcing companies to bring a run of record investor payouts to an end, market commentators have warned.

Vodafone and Marks & Spencer were recent high-profile examples of firms opting for cuts of 40% and 26% respectively in May, leading to punishing falls in their share prices and opening up buying opportunities for some equity investors.

This followed an expectation-beating total of £99.8bn paid out by UK companies in 2018, followed by a record Q1 dividend total of £19.7bn, according to Link Asset Services (LAS), with the UK witnessing strong and consistent dividend growth for the past five years, according to Sharecast.

However, the Q1 dividend count was heavily influenced by one-off special payments, and Link indicated at the time that dividend growth would be slower than previously anticipated this year, down from 5.3% to 3.9% for 2019.

Chief market analyst at IG Group Chris Beauchamp said the UK has seen a “seismic shift in dividends” following a record multi-year run and it “would not be surprising to see a lot of other [companies] easing back on their dividends”.

Beauchamp said equity income investors who are “unnerved after such a tough run over the last few weeks”, should expect a “leaner year” as a combination of pressures face UK companies.

He explained: “It is an uncertain time; we are facing bigger issues now than we have done for a while.

“Clearly Brexit remains front and centre and we are yet to see what impact the US/China trade wars will have on the UK.

“We should be expecting more weakness to come through in terms of dividend growth, we should not assume that the outlook is going to remain rosy.”

Beauchamp highlighted utilities as “a prime target for cuts over the next few years”, as well as high street retail brands.

Management ‘getting real’

David Coombs, head of multi-asset investments at Rathbones, agreed that issues such as Brexit, a slowing economy and evolving consumer trends are among those forcing boards to consider sacrificing high dividends in favour of investing more in their businesses.

He said: “There is massive disruption going on in many sectors across economies driven by technological changes, consumer changes and political changes, for example. You will have to see more dividend cuts this year.”

Coombs said he voted in favour of Vodafone’s dividend cut for this reason, and despite “the CEO getting rewarded with a 10% smack on the share price”, it was “the right thing to do”.

He used the share price decline as a buying opportunity, which has already paid off with Vodafone recovering its lost ground in the weeks since the dividend cut.

Income investors face a “leaner year” amid further dividend cuts for UK-listed firms, with structural and macroeconomic pressures forcing companies to bring a run of record investor payouts to an end, market commentators have warned.

Coombs added: “I understood what [the Vodafone CEO] was trying to do in improving the balance sheet strength and reducing its reliance on debt, for example.

“Not every stock with a dividend cut is worth buying but there are some companies where the dividend cut should make them better placed to grow in the future. And that growth will be more of a surprise to the market.”

Manager of Sanlam’s Active UK Equity fund, Chris Rodgers, agreed balance sheets were a key indicator of dividend uncertainty, which he said “often goes hand-in-hand with high debt”.

He added that “too many” in management have made empty promises about maintaining dividends to investors, who have “been hung high and dry by that promise”.

Rodgers said: “Where you are seeing dividends cut, it is as much that management are getting real about the need to invest in their business to stay competitive.

He also pointed out that sustaining a high dividend fails to consistently help the share price and even high dividend payers like BT, for example, “will probably cut their dividend at some point too”.

Stephen Message, manager of the L&G UK Equity Income fund, said while macro issues such as Brexit are “in the back of the minds of boards when they are making these decisions”, resulting in them becoming “a bit more cautious”, he disagreed that companies are actually cutting dividends as a result of it.

Instead, he said dividends face greater risks given the higher cyclicality of the particular industry, in addition to companies having low levels of dividend cover.

However, Brexit could have a beneficial effect for the FTSE 100’s largest firms, which are often dollar earners, he explained.

Message said: “The fact that sterling is likely to be weak is going to provide quite a tailwind for some of these mega caps and
their dividends.”

Link’s Q1 dividend monitor showed strong yields in tobacco stocks and miners, while oil and pharmaceuticals accounted for almost two-fifths of the quarter’s dividends.

Message said oil and mining dividends are likely to remain strong with the industries showing good levels of “capital discipline”, while he is “tentatively building up positions from a low base in some tobacco stocks” as “the risk/reward is looking increasingly compelling given where share prices and yields are”.

Meanwhile, Message said further dividend cuts could be seen in pharmaceuticals and in the energy supply market, where “companies like Centrica… have a very high yield, which means the market has a degree of scepticism about the sustainability” of dividends.

This is reproduced from Investment Week; all views are from the publication. This originally appeared online on 10 June 2019.