FTSE 100 dividends are forecast to fall £18 billion in 2020

After further dividend cuts and reductions in analysts’ estimates, FTSE 100 dividend payments are forecast to fall 24%, or £18 billion, in 2020 after an 11% drop in 2019, leaving the total at its lowest level since 2012. That means the FTSE 100 is currently expected to yield 3.5% for 2020, increasing to 4.2% in 2021.

Dividend forecasts for the year have slipped by a further 10% in the third quarter to £56.5 billion from £62.3 billion in June (and £91.1 billion in January). This is largely the result of BP’s decision to slash its second-quarter dividend in half, delivering a huge blow to income-seekers.

As a result, dividend payments are now expected to fall for two consecutive years before starting to forge a recovery in 2021.

Source: Company accounts, Sharecast, analysts’ consensus dividend forecasts

Biggest dividend cutters and raisers

In total, 35 members of the index have cut, deferred or cancelled payments for 2020 thanks to the COVID-19 viral outbreak and subsequent recession, while 28 have maintained or increased one for fiscal 2020.

Just four firms are expected to be responsible for the bulk of the 24%, or £18 billion, of dividend cuts across the index:

Ten biggest dividend increases and ten biggest cuts as a % of the FTSE 100 total

Source: Sharecast, consensus analysts’ forecasts, company accounts

BAT is now set to be the biggest dividend payer this year

Investors also have to again assess the concentration risk which has dogged those who have sought income from the UK stock market for some years. Just ten stocks are forecast to pay dividends worth £29.6 billion, or 52% of the forecast total for 202. The top 20 are expected to generate 75% of the total index’s pay-out, at £42.3 billion.

Source: Company accounts, Sharecast, analysts’ consensus forecasts, Refinitiv data

After dividend cuts or cancellations from Shell, HSBC and BP during the course of the year, British American Tobacco is now forecast to be the biggest dividend payer in the FTSE 100 in 2020.

Not all investors will welcome this, especially those who feel that tobacco does not pass their socially responsible investing (SRI) screen tests. However, others will welcome how BAT’s chief executive Jack Bowles continues to stick to his target of a 65% dividend pay-out ratio. The company’s interim results offer support to earnings forecasts too, in the absence if changes to sales and earnings guidance for both 2020 and the medium-term.

What also catches the eye in the list of biggest payers is how BP and Vodafone still offer yields of more than 8%, even after their dividend cuts of 2020 and 2018 respectively, while two other cutters, Imperial Brands and Aviva are both forecast to provide a yield of more than 10%.

Aviva is one of ten FTSE 100 firms – alongside BAE Systems, Bunzl, DS Smith, Land Securities, Mondi, Persimmon, Smiths Group, Smurfit Kappa and WPP – to have restored dividend payments or declared their intention to do so.

Yet that 10% forecast yield may make investors nervous, even though chief executive Amanda Blanc has a clear mandate to shake up the life insurer after her appointment to replace Maurice Tulloch in July.

Other double-digit forecast dividend yields that looked good on paper but too much to sustain in reality include those (theoretically) once offered by Centrica, Vodafone, Taylor Wimpey, Persimmon and Evraz where the hoped-for dividends ultimately did not materialise. If Aviva can deliver, then the shares could prove to be very cheap indeed.

M&G is forecast to be the highest-yielding stock, while nine firms are set to pay nothing

Investors will have to look carefully at the list of the highest-yielding firms, as some of them have a track record of having to cut their dividend payments when times get tough.

At the time of writing, relative market newcomer M&G is the highest-yielding individual stock, with Imperial Brands and Aviva pretty close behind it. M&G is also the only one in the top ten to have earnings cover of two times or above, according to analysts’ forecasts for 2020.

Source: Company accounts, Sharecast, analysts’ consensus forecasts, Refinitiv data

Nine FTSE 100 firms not expected to pay a dividend at all in 2020, with 15 more offering a forecast forward yield of less than 1%:

Source: Company accounts, Sharecast, analysts’ consensus forecasts, Refinitiv data

Dividend cover remains stubbornly thin despite dividend cuts

While it is understandable that cover will be lower than ideal during an economic downturn as earnings come under pressure, the aggregate earnings cover ratio for the FTSE 100 is just 1.42 times, barely changed from a quarter ago, despite further dividend payment reduction. That equates to a 70% pay-out ratio and suggests that management teams as well as analysts and shareholders are pinning their hopes on a pick-up in economic activity and therefore profits and cash flow in the second half of 2020 and beyond.

More encouragingly, analysts seem to think that boardrooms will not look to splash the cash too quickly if the good times do start to roll, as earnings are forecast to grow faster than dividends in 2021. That would allow earnings cover to start to move back towards the 2.00-times threshold that provides a safety buffer in the event of the unexpected – such as a double-dip recession.

Source: Company accounts, Sharecast, analysts’ consensus dividend forecasts

A renewed drop in economic activity – for whatever reason – could still pose a big risk to dividend forecasts, as a 47% recovery in profits is anticipated by analysts for 2021 in the wake of 2020’s expected 40% plunge.

Source: Company accounts, Sharecast, analysts’ consensus dividend forecasts

At least analysts are not expecting 2021’s profits to return to the pre-pandemic levels of 2018 or 2019, which does suggest they are not going overboard.

However, two-thirds of 2021’s expected £52 billion increase in pre-tax income is forecast to come from just three sectors – oils, financials and miners – all of whom could do with an economic tailwind if they are to live up to such expectations, even allowing for the cost-cutting plans.

Source: Company accounts, Sharecast, analysts’ consensus dividend forecasts

If the economy offers little or no assistance – or even hinders – then these earnings forecasts, and by extension, dividend payment estimates could find themselves exposed to the downside.

Every quarter, we produce our 'Dividend dashboard' - a forecast of dividend payouts for FTSE 100 companies.

View our Dividend dashboard for Q3

These articles are for information purposes only and are not a personal recommendation or advice. Forecasts aren't a reliable guide to future performance.