How trusts are bucking the dividend cut trend

How trusts are bucking the dividend cut trend

The impact of the coronavirus crisis on markets has been disconcerting for income investors, with companies freezing dividend rises or cutting them altogether. 

Over the past fortnight, banks and insurers have axed payouts after the Prudential Regulation Authority and the Financial Conduct Authority called for "restraint" over paying out income amid this crisis.

While this looks to be the responsible thing to do, it had a knock-on effect on share prices and confidence, pushing both lower. For example, banking giant Lloyds' share price at the start of 2020 was over 60p – at the time of writing, it stood at 30.71p.

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Adrian Lowcock, head of personal investing at Willis Owen, said: "Clearly we are in extraordinary times, and the banks had little choice but to comply with the wishes of the UK's regulators, but nonetheless this is another hit to investors already reeling from the losses being seen across markets."

Nor are cuts limited to those put under pressure by the regulators. Link's quarterly dividend monitor, published on April 9, noted that 45 per cent of UK companies had cut payouts already this year. In a best case scenario, it predicts UK dividends will fall 27 per cent to £76bn this year – with a worst case scenario seeing a 51 per cent reduction.

And it is not just UK-based companies; globally, earnings have suffered as a result of the Covid-19 induced lockdown, and company boards have been making savings wherever necessary – including shaving or snuffing out dividends – to ensure the fiscal stability of the business.

Jupiter's open-ended fund managers collectively commented that the coronavirus had been "putting an end to the dividend".

Jason Pidcock, manager of the Asian Income fund, said: "There is no doubt there will be a widespread cut in dividends.

"I imagine most companies will cut, but there will be a few who cancel altogether and a few who maintain dividends even in the face of lower earnings by paying from a strong balance sheet, probably where they are in a net cash position.

"Ultimately, dividends have to be funded by earnings, and earnings will be under pressure this year. At this stage we are hopeful that there will be an earnings recovery in 2021, which ought to be positive for dividends."

A note from analyst Peel Hunt said investors looking for income would "have to work especially hard to find it over the coming months."

The Investment Association recently issued a letter on behalf of its institutional investors to FTSE companies' chief executives, which pledged support from shareholders at this time, but also asked company boards to be mindful of investors.

One of the points raised was on dividends. The IA's open letter stated: "Dividends are an important income stream for many savers, pensioners and institutional investors, including pension funds and charities.

"Shareholders ask companies to take into account the suitability and sustainability of a dividend payment in light of current uncertainties. Shareholders expect companies who do decide to suspend dividend payments to restart them as soon as it is prudent to do so.