Just ten firms now forecast to pay two-thirds of FTSE 100's 2020 dividends

As Smurfit Kappa and Ferguson decide to withhold their next scheduled dividend payments, no fewer than 32 members of the FTSE 100 have now moved to cut, suspend, defer or cancel a shareholder distribution and income investors are no doubt bracing themselves for further bad news.

But as income-seekers do their research as to what the yield on the FTSE 100 might be in 2020, they can cut the field down pretty quickly when it comes to which firms now really matter.

If you assume that all of those firms to have withheld their next dividend elect to pay nothing at all in 2020 – and firms still have the option of catching up later in the year if they feel the operational, financial and political circumstances permit – then the aggregate consensus forecasts for the other 60-odd FTSE 100 members still comes to £64 billion, down from £85 billion in 2018 and £75 billion in 2019.

Source: Company accounts, Sharecast, consensus analysts’ forecasts. *Based on consensus forecasts and company announcements to date. **Based on consensus forecasts but assumes all firms to have withheld any payment offer zero for 2020.

The £64-billion question therefore is how reliable is that forecast, as it still implies a 4.1% dividend yield for the FTSE 100, a level which could offer some support over the long term, if investors decide it is indeed safe, especially as returns on cash and benchmark Government bonds are at or near record lows and offer no protection from even the UK’s modest levels of inflation.

The starting point that a third of the FTSE 100’s members make no dividend payment at all offers some sort of downside protection so attention must then focus on the largest payers.

Based on current consensus forecasts, again assuming that previous withholders pay nothing in 2020:

• Just 10 firms are forecast to pay out £42 billion in dividends in 2020, or 66% of the total. If these 10 pay out and no-one else does, then the FTSE 100’s dividend yield would be 2.7%.
• Just 15 firms are forecast to pay out £49 billion in dividends in 2020, or 76% of the total. If these 15 pay out and the other 85 offer nothing, then the FTSE 100’s dividend yield would be 3.1%.
• Just 20 firms are forecast to pay out £54 billion in dividends in 2020, or 84% of the total. If these 20 pay out and no-one else does, then the FTSE 100’s dividend yield would be 3.4%.

Source: Sharecast, consensus analysts’ forecasts, Refinitiv data

Investors therefore need to be sure about these 10, 15 or 20 names above all others, especially as earnings cover among the top 10 does not come too close to the 2.00 mark which offers some comfort during times of economic uncertainty.

At the end of February, 46 FTSE 100 members offered estimated earnings cover of 2.00 or more for their forecast dividend in 2020. If you now assume none of the payment withholders for late 2019 or early 2020 offers any sort of dividend in 2020 that figure drops to just 25.

Of the top 10 payers by actual size of distribution, Shell and BP have both offered trading statements which have emphasised how cuts to capital investment, cost reductions, asset disposals and fresh debt would provide ample liquidity. Shell suspended its buyback programme but neither firm even mentioned the dividends, to suggest Shell and BP seem determined to defend their planned payments.

The only other one of the top 10 to offer a firm statement is Diageo which has confirmed payment of its interim dividend for the six months to December 2019.

Further down, Legal & General has brushed aside entreaties from the Prudential Regulatory Authority and declared its intention to pay a final dividend for 2019. Tesco has declared a final dividend and stuck to its plan to pay a special dividend in the second half once the sale of its Thai and Malaysians go through. SSE has repeated its goal of an 80p-per-share distribution, although management did say it would continue to monitor the situation.

In addition, Prudential is now longer subject to PRA rules and has the Hong Kong Insurance Authority as its regulator, and the hullaballoo in Asia over HSBC’s move to pass on its final 2019 dividend means the insurer will be popular over there if it holds its ground and makes its payments on time.

That may be seven of the 20 off to a good start, at least so far as income-seekers are concerned, but investors must still proceed with caution. Companies which accept government help in the form of relief from business rates, delayed VAT payments, the staff furlough scheme or perhaps even the Bank of England’s Covid Corporate Financing Facility (CCFF) will wish to avoid giving the impression that they are drawing on the public purse with one hand and then handing that money to shareholders with another. Such perceptions did little for the reputation of Persimmon with regard to its dividends, special dividends and executive pay schemes, with the result that both the company chairman and chief executive left their posts.

Investors will therefore have to keep doing their research on these 20 firms in particular if income is their primary aim. But their analysis will need to go beyond earnings cover, cash flow, the debt and pension and lease obligations on balance sheets and the maturity timeline of any borrowings and take into account any assistance received during the current crisis and how front-line staff are being rewarded for helping to keep the show on the road.

Regulators are already bringing banks and insurers to heel in the UK and the US bail-out package for airlines expressly forbids dividends and buybacks until autumn 2021, after all.

For more information on UK-listed companies which have cut, suspended, or deferred dividend payments, take a look at our Dividend tracker.

These articles are for information purposes only and are not a personal recommendation or advice.