UK dividends resume earlier than expected

Laura Foll, UK income Fund Manager, provides an update on the change in outlook as UK companies resume dividend payments after a period of suspensions and reductions

Transcript

My name is Laura Foll and I’m one of the Fund Managers that manages UK income funds here at Janus Henderson.

I’m filming this video to give a brief update on UK dividends because in the last few months, since I last filmed an update, the outlook has changed quite a bit and even within the last two three weeks we’re beginning to see companies resume dividend payments, which will be the focus of this video.

So when I last filmed, which was around April/May time, you were seeing a large number of companies in the UK cut their dividends. Either suspending the dividend entirely or just reducing their payment and what that means is, depending on whose numbers you look at, for the UK as a whole this year dividends are forecast to fall between 40 and 50 percent. To put that in context that’s materially worse than the financial crisis where dividends fell roughly 15 percent – peak to trough – compared to that 40 to 50 percent number that we’re seeing this year.

What you’re seeing literally within the last two to three weeks is a few companies, and I think it’s now becoming a trend, resume paying their dividends and that’s earlier than I was expecting and a number of other market participants were expecting as well.

So to give you a few concrete examples, BAE systems, which is a defence provider here in the UK has resumed both an interim payment but also, and this is really important, a catch up of the final dividend they had previously suspended. So not only are you getting the interim dividend that you would normally get this time of year you are catching up the dividend that they had previously missed and we’ve seen a number of other companies do this. We saw another industrial company called IMI announce the same thing. We’ve seen Direct Line catch up on the final that it had previously suspended. So it’s really becoming a trend. I think that’s really encouraging because I wouldn’t have said if you’d asked me a month or two ago I would have hoped that that could happen but I certainly wouldn’t have said it’s a given. So I think that that’s a really positive point.

Another point to make is that it’s not just one sector where we’re seeing this. We see BAE which I mentioned which is the defensive provider, IMI which is an engineer, we’ve seen some of the insurers catch up. We’ve also seen some of the property owners catch up. This is the likes of Palace Capital which is an office and property provider here in the UK. So it’s not just one sector it’s a number of different sectors which I think is equally encouraging.

So what does all this mean? What do we read into the fact that dividends are coming back? What does that mean? I think the biggest indicator that the dividends are is confidence. So a company won’t pay a dividend if they really don’t have any confidence in where trading is going to be in the next three weeks or months to come. And that’s really what we saw in the peak of lock down in March/April type time. A lot of companies suspended their dividend. Even companies that had strong balance sheets that were in traditionally defensive industries. But there was just such a huge amount of uncertainty that you saw companies and Boards effectively; Boards make the dividend decisions just go ‘you know what? I don’t know. I don’t have the confidence to do this.’. So the fact that dividends are coming back is a real sign of confidence; I think that management teams and Boards are saying that ‘we are seeing trading conditions stabilise’. So I think that’s the number one thing to take away from it. I think what it also gives us is more confidence that 2021 will see some level of dividend growth that may not sound a particularly contentious point but there is a bit of a debate in the market about whether 2021 will be an up year or another down year for dividends. I think what this shows is the beginnings of stabilisation which gives me some hope that 2021 will at least see a modest recovery in dividends. So I wouldn’t anticipate I certainly wouldn’t anticipate a return to 2019 levels of dividends. So I think, bringing this all together, I think it’s a positive thing. I think it shows confidence is returning to some aspects of the UK market and for an income investor like myself. It’s a really encouraging sign. Thanks.