- Lowland – 43% of the portfolio has suspended or cancelled dividends – 42 companies have suspended/cancelled so far
- Lowland has a decent size exposure to small cap companies, which tend to be more domestically exposed and on average more cyclical, therefore have tended to cut first.
There are a few factors to consider with these numbers. Some dividend changes are in our view, genuine deferrals rather than cancellations. For example BAE Systems has, in our view, only deferred rather than cancelled its dividend in recognition that it receives a large amount of government money from the Ministry of Defence. There is also a timing factor to consider. Depending on when a company reports and pays its dividends, some companies have had to make decisions earlier than others and there are some sectors/companies where dividends are, for now, left unchanged but could be at risk in the future (one area that this could be relevant for is the oil companies, where the dividends are not covered by free cash flow at the current oil price). Some companies including REITs have a minimum distribution level so we would expect companies including Land Securities and Palace Capital to return to the dividend list relatively soon once rent collections become clearer.
Lowland has always had a focus on capital growth with income seen as an output, therefore at the moment we are actively buying companies that have already suspended or cancelled their dividends, including industrials such as Hill & Smith and Morgan Advanced Materials, and property companies such as Land Securities. We think the prices we are adding to the positions will mean that when these companies return to the dividend list, which we think they will, these will prove to be attractive dividend yields on the current prices.
Dividend suspensions and cancellations have been accelerating in recent weeks and began with companies most directly affected by shutdowns as a result of the virus, for example Johnson Service Group which launders hotel and restaurant linen. The suspensions have now become more widespread across sectors including industrials, housebuilders, property companies and banks. Our perception is that any company that is currently using the staff furloughing scheme, government guaranteed loan scheme or any of the other fiscal policy tools available (either now or management teams think they may use them in the future), is choosing to suspend dividends pre-emptively. Therefore undoubtedly this will be a difficult year for income generation and we think some companies will take the opportunity to rebase their dividends to a sustainably lower payout ratio. This will not necessarily be a bad thing in the long term – balance sheets will have more of a ‘buffer’ built in, and companies will likely use some of the additional cash held back to invest in capital equipment (we may see UK productivity boosted in the long term as a result).
The question for us has now become which sectors are likely to pay, rather than which sectors are likely to suspend dividends. In our view traditionally defensive sectors such as pharmaceuticals and utilities are likely to continue to pay their dividends. There is a ‘question mark’ regarding insurer dividends but the insurance companies held went into the current downturn with strong Solvency II positions and largely investment grade and government bonds on the balance sheet. Despite the European insurance regulator encouraging dividends to be cancelled last week, since that announcement Legal & General (not held in the portfolios) has chosen to continue to pay their dividend, as has Sabre insurance (a motor insurer we do hold), which chose to cancel its special dividend but continue with its ordinary payment. In our view insurers are in a position where they can pay, but some may, for prudence, reduce the dividends from the levels they were planning on distributing. Other sectors such as industrials and housebuilders could bounce back strongly in terms of dividend payments when economic activity troughs and recovers, as many of the companies held went into this with already strong balance sheets (having learned the lessons of the financial crisis). For example the housebuilders we hold, Bellway and Taylor Wimpey, both went into this downturn with net cash balance sheets. Therefore while 2020 will look very difficult for dividends, 2021 should in our view bounce back albeit not to 2019 levels.
As an investment trust, the decision around dividend level is ultimately made by the Board, however it is worth noting that we have substantial revenue reserves that could be used to ‘smooth’ income payments. The Trust has a long track record of growing (or holding) the dividend and will be keen to keep that track record, however we will need to continually assess dividend levels throughout the year as it is a fast changing situation.
Small cap: a term used to classify companies with relatively small market capitalization
Capital growth: an increase in the value of an asset or investment over time
Dividend: A payment made by a company to its shareholders. The amount is variable and is paid as a portion of the company’s profits.
Solvency II: set of rules governing how insurers are funded and governed
Investment grade: is a rating that signifies a municipal or corporate bond presents a relatively low risk of default
Government bond: is a rating that signifies a municipal or corporate bond presents a relatively low risk of default