InvestmentsApr 1 2020

Income dries up as banks axe dividends

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Income dries up as banks axe dividends

The UK’s biggest banks have scrapped their dividend payments for the rest of the year following pressure from the central bank to maintain a cash buffer for the coronavirus crisis.

A statement from the Prudential Regulation Authority last night (March 31) welcomed the decision by the boards of the large banks, saying it was a “sensible precautionary step” given the role the banks played in supporting the wider economy.

Deputy governor and chief executive of the PRA, Sam Woods, had previously written to the CEOs of the major banks, asking them to suspend dividends and buybacks on ordinary shares and to cancel payments of any outstanding 2019 dividends.

Mr Woods told banks the PRA stood “ready to consider use of [its] supervisory power” should they not agree to take such action.

The banks, which include HSBC, Standard Chartered Bank, Barclays, RBS and Lloyds Banking Group, were due to pay out £7.6bn in dividend income to shareholders, according to AJ Bell analysis.

UK banks have historically been a popular choice for income seekers due to their high dividend yields. Lloyds pays out 10.5 per cent, while Barclays and HSBC have yields of 9.6 and 9 per cent respectively.

The PRA said yesterday: “Although the decisions taken today will result in shareholders not receiving dividends, they are a sensible precautionary step given the unique role that banks need to play in supporting the wider economy through a period of economic disruption, alongside the extraordinary measures being taken by the authorities. 

“We do not expect the capital preserved to be needed by the banks in order to maintain adequate capital positions, but the extra headroom should help the banks support the economy through 2020.”

Income investors have already seen two weeks worth of dividends being pulled as companies sought to preserve cash during the pandemic.

UK blue chips such as Taylor Wimpey and ITV have both withdrawn their dividends for this year, costing income investors £485m and £216m respectively, while mid-caps such as Domino’s Pizza, Hill & Smith and Marshalls have also cut their payments.

So far this year, UK companies have cut their dividends by £15.4bn, according to AJ Bell.

Yesterday’s move by the banks will particularly affect UK equity income funds with a value tilt. Such funds will typically hold one or more banks, meaning their income is highly concentrated in stocks which have scrapped their dividend payments for this year.

For example, the £1.5bn Schroder Income fund holds both HSBC and RBS in its top ten holdings, accounting for a combined 8.3 per cent of the portfolio.

Lee Wild, head of equity strategy at Interactive Investor, said: “A few short weeks of dividend suspensions and cancellations look set to become a long hard slog for income seekers as companies rush to save cash amid the unprecedented coronavirus lockdown.

“Investors will have to get used to receiving their dividend income from a shrinking pool of stocks for the time being and income diversification, both at a sector and country level, will likely become even more key.”

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