BT makes deeper dividend cuts than expected and scary numbers in International Consolidated Airlines’ update

“Better-than-expected data from China took the markets by surprise and helped to stabilise earlier declines in parts of Asia and also gave support to the FTSE 100,” says Russ Mould, investment director at AJ Bell.

“Exports from China rose 3.5% in April year-one-year versus expectations for a sharp decline, thus leading investors to speculate that the country could quickly recover from the pandemic.

“Mining and oil shares rallied on the FTSE as investors bet that commodities demand could soon improve as China gets back to work. Anglo American, Royal Dutch Shell, BHP and Rio Tinto were among the top risers on the UK market. The FTSE 100 traded 0.4% higher at 5,878.

“European markets also pushed ahead and the pound gained 0.5% against the US dollar to $1.2398."

BT

“After more than a year of commentators saying BT should stop spending so much on dividends and divert that cash into improving its infrastructure, we’ve finally got confirmation it is going down that path.

“One might be shocked that dividends are off the menu for at least the next 18 months rather than a short-term suspension. However now is the perfect time for BT to bury all thoughts of a dividend in favour of making its business more competitive.

“Years of paying dividends have made BT a popular stock among investors, particularly those in retirement who rely on their pensions to generate an income. The dividend cut will therefore be a blow to a lot of people’s finances.

“However, its investors shouldn’t have really been expecting a dividend at the moment, given so many other large companies are pausing the shareholder payment and the fact that BT has high debt levels and large capital expenditure requirements.

“BT ultimately has much more pressing needs for its cash and so investors should support its decision to accelerate the roll-out of its fibre-to-the-premises network. Giving up dividends now could be a small sacrifice if it enables the business become stronger for longer.

“The timing is impeccable given news of a merger between O2 and Virgin Media which creates the UK’s largest phone and internet operator. BT will now have a full-fledged competitor in fixed and wireless phone, broadband and television.

“Analysts had previously expected BT’s dividend to be one third lower by the end of the current financial year, so guidance for a 50% cut once dividends restart in the 2022 financial year shows management have taken quite a big axe to the pay-out. It also suggests that management have rebased the dividend so shareholders will have to expect much lower payments permanently when they do restart.”

International Consolidated Airlines

“Some of the numbers in British Airways’ latest update are scary. What really stands out is that nearly all of the half a billion pounds worth of losses racked up in the first quarter came in just two weeks at the end of March.

“The market hardly needs telling that the second quarter will be worse. Airlines incur huge expenses which cannot be cut overnight to match the very rapid drop-off in passenger numbers.

“The company has taken cash costs out of the business and is rapidly moving forward with restructuring plans but these will require careful negotiation with unions, staff and regulators.

“While it is taking advantage of the state aid which is available, the company makes clear it is not looking for a government bailout – probably aware that one would not be forthcoming even if it asked.

“A plan to relaunch at 50% capacity in July could prove overly optimistic, although the concession that a return to full capacity is unlikely until 2023 suggests there is plenty of realism in IAG’s boardroom.

“Current CEO Willie Walsh may be sticking around to help manage the business through what it will hope is the peak of the crisis but his replacement Luis Gallego must still feel like he’s being asked to pilot a jumbo jet on a single engine.

“Assuming he can navigate the current turbulence, he will face other long-term headwinds. Will people still be as willing to use air travel amid growing awareness of the risks of climate change and will business people still look to fly as often on lucrative routes such as London to New York once they get used to video conferencing?”

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