9th April 2020
The recent measures to help stop the spread of Covid-19 from our government and those around the world have, naturally, slowed down economic activity and with it overall consumer spending, with visits to most shops and restaurants on hold for the time being. Effectively creating a pause in sales, the situation has left many companies revaluating their overall structure and indeed their balance sheet as they stress test financial models considering the possibility of zero revenues for some months.
Faced with tough decisions on operational costs such as staffing, marketing and premises, most companies will be looking to strengthen their finances by saving money where they can, until the government measures are eased. An obvious option for companies with excess cash on their balance sheet will be to defer their dividend pay-outs until they are in a position to comfortably forecast sales again. The result is that more than a quarter of FTSE 100 stocks have opted to announce a suspension on pay-outs given the current backdrop. Although unprecedented, the news so far has been met with little resistance, as even those who have consistently been rewarding shareholders for years have adopted measures to put things on hold. Despite news of deferrals in perhaps more obvious industries such as general retail, travel and leisure, and banks, even companies with growing sales, such as supermarkets, are taking precautionary steps.
That said, there are plenty of large firms still honouring their original dividend proposals, either by using existing cash provisions or by strengthening their finances in order to pay out as planned, stressing that long-term investors are unlikely to be materially affected by the current situation – a sentiment shared by city analysts, as they urge investors to focus on quality and to consider companies’ ability to pay future dividends, rather than what is happening right now.
These dividend cuts will naturally be of concern to many clients who seek to support their income with investment income from portfolios. Over the next twelve months, investment income will be impacted by this, but at this point these cuts are very much about supporting balance sheets and we are seeing companies err on the side of caution and suspend dividends with the potential to reinstate them later in the year when they have clearer visibility on economic activity.
We are in ongoing dialogue with the fund managers whose funds we are invested in to obtain updates on the likely effect of dividend cuts on fund yields. We remain focused on managing well-diversified portfolios for the long term and it should be remembered that the portfolios are diversified across a range of asset classes, not all of which are affected.
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