One of the most striking features of the current crisis, from a stock market perspective, is how sharply and suddenly UK firms have cut their dividends in response to the drop in demand for their goods or services.

In March alone, UK companies cancelled or postponed more than £4bn in forecast dividend payments. Both the speed and the size of the cuts are unprecedented.

Last week, housebuilders Persimmon (PSN) and Taylor Wimpey (TW.) cancelled or postponed a combined £1.2bn of dividends as they shut their construction sites and the Government urged people not to move house.

Many share buybacks have also been stopped, such as in the case of publishing group Pearson (PSON), flooring firm Headlam (HEAD) and travel outlet retailer SSP Group (SSPG).

REDUCED REVENUES

In order to continue functioning through the crisis, however, firms are having to do more than just postpone or cancel their dividends and buybacks.

Firms which have been hit by the travel ban and the restrictions on freedom of movement are in some cases seeing no revenue at all coming in the door.

In the case of the high street retailers, those without an internet offering such as Associated British Foods’ (ABF) Primark, and even those with an online offering which has now had to shut such as Next (NXT), could be facing months of famine.

Fortunately, both firms have strong business models and balance sheets and should be able to weather the storm, and Government help is available including relief from business rates. For weaker operators though, the future looks bleak even with Government help.

SHARING THE BURDEN

For many firms, their biggest cost is their employees. Even firms with low fixed costs compared to their revenues, such as furnishings group Victoria (VCP:AIM), have warned staff that ‘there is no reasonable scenario where there will be no impact on employment’.

Some firms are introducing short-term working or asking employees to take annual leave. However, in an unusual show of solidarity, many firms including Victoria have introduced pay cuts of 20% or more for senior and middle management in order to ‘share the financial burden’ and minimise the impact of the shutdown on their employees.

As well as cutting board and senior management pay, pest control firm Rentokil (RTO) has scrapped its bonus scheme and the current long-term incentive plan grant has been postponed.

Most firms have frozen pay increases and recruitment – except for critical hires to meet contract commitments – and are chasing Government-backed assistance measures like the Job Retention Scheme, to help staff affected by the lockdown through the crisis so that when demand recovers they can get back up and running as quickly as possible.

SHIFTING THE BURDEN

Another high fixed cost for many firms is rent. Even before the crisis, many companies particularly in the retail sector were in talks with their landlords to reduce their rent charges.

Car accessories and bicycle retailer Halfords (HFD) and sofa seller DFS (DFS) have both said they are in discussions with their landlords regarding rent relief, with Halfords pursuing an immediate switch to monthly payments from quarterly.

Primark has taken more drastic action by withholding rent due on 110 UK leasehold properties in order to prompt ‘urgent’ conversations with its landlord over rental terms, according to trade journal Retail Gazette.

Other ways for firms to shift the burden is onto suppliers, by reducing the amount of goods they order or delaying orders. Primark and Halfords are among many companies who have cut orders, including for goods not for resale.

Many firms are also cutting variable costs such as advertising and marketing in order to conserve cash, which means media firms are seeing their revenues evaporate.

REINING IN GROWTH

As well as optimising their working capital by postponing purchases and cutting back on core spending where possible, companies are also reducing their non-essential spending including restructuring and growth plans.

DFS has deferred the opening on six new showrooms which it had planned to open this financial year, while SSP says its store-opening programme had ‘ceased’ altogether.

Electrical goods retailer Dixons Carphone (DC.) said it would reduce non-essential spending very significantly in the first half of its financial year, ‘which would cause some delays to the transformation plans but will have no lasting impact on the long-term success of the business’.

As well as cancelling their dividends, most of the housebuilders have put the brakes on land purchases in order to conserve capital. Retirement home builder McCarthy & Stone (MCS) has halted new purchases while ‘contractually committed land spend has been reviewed and minimised where possible’.

Finally, firms which have relied on acquisitions to help drive their sales growth, such as Rentokil, have had to pull the plug on plans to expand for the time being and hunker down until the crisis is over.

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