Managers warn of dividend cuts

Managers warn of dividend cuts

Many of the shares on the UK market regarded as "safe" income stocks are likely to have to cut their dividends soon, according to Neptune fund manager and founder Robin Geffen.

Mr Geffen was commenting in the wake of Vodafone cutting its dividend by 40 per cent on Tuesday (May 14).

The fund manager said the majority of UK income funds were dependent on "a small number of high-yielding stocks" to generate their overall yield.

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About half of all UK equity income funds owned Vodafone, he said, and Neptune calculates that of the nine other companies that pay about 50 per cent of all dividends on the UK market, several will have to cut their dividends soon as their earnings fall.

Mr Geffen cited Imperial Brands, BT, and British American Tobacco as examples of companies he doesn’t own in the £250m Neptune Income fund he manages, as he fears the dividends will be cut.

Mr Geffen said the level of dividend cover, that is, the amount of cash generated by those businesses will not be enough to pay the dividends.

James Dow, who jointly runs the £628m Scottish American Investment Trust at Baillie Gifford, is another investor worried about the durability of UK dividends, and also expects dividend cuts to happen.

He said: "The problem with the UK market is that a lot of the shares that pay a dividend are oil and banks, so very cyclical, and the dividend can’t be relied upon."

Mr Dow is not keen on the shares of UK telecoms companies as he feels they have to spend a lot of capital to maintain their networks, and so have less cash for dividends.

This means Mr Dow has focused the investments in his trust away from the UK.

Scott McKenzie, who runs the Saracen UK equity income fund, said large cap UK shares have unattractive dividend prospects and instead he is focused on mid and smaller company shares.