This year has seen 233 London-listed companies either cancel, cut or suspend their dividends, principally because of the coronavirus crisis. This is terrible news for anyone who relies on their investments for income.

In many instances, even previously-declared dividends are not going to be paid, a terrifying trend only seen during times of massive distress that has returned as fiscal prudence becomes the order of the day.

Investment bank Liberum forecasts that UK dividends – if they are paid at all – will only grow by 1.3% over the next 12 months, versus a 6.7% historic average for the FTSE All-Share. The outlook is even worse in Europe, where it expects dividends to drop by 7% compared to a historic average growth rate of 5.3%.

In this article we reveal the companies which aren’t going to be paying dividends soon, and why investors should really support these decisions despite losing out on a valuable income stream temporarily.

We also look at where you might be able to find more reliable dividends in the near-term.

WHY HAVE DIVIDENDS BEEN CUT?

Global lockdown has put the economy into an induced coma. Factories are closed, shops are shut, consumers are trapped indoors and businesses are running at reduced capacity, and so companies desperately need to preserve cash to see them through the crisis.

In particular, with earnings set to plunge, indebted firms must preserve cash to avoid breaching their banking covenants.

Paying dividends now would send the wrong message if companies are looking to use the Government’s furlough scheme or defer other payments such as rent.

Many share prices have rallied on news of a dividend cut. Savvy shareholders understand that profit forecasts are likely to be wrong and are looking instead for guidance on the financial resources available to a firm, its banking covenants and what levers management can pull to help come through the crisis and be ready for the eventual upturn.

If a dividend cut is part of the near-term price that must be paid to ensure a firm’s long-term survival or avoid a major rights issue or debt-for-equity swap, investors will accept it.

In the case of companies that had been overly-generous with dividends, perhaps to curry favour with income-hungry investors, some may be using the anticipated downturn as an opportunity to reset payout expectations. This would help them better balance the need for investment in the business, the desire to pay down debt and the requirements of pension funds with shareholder demands.

Across the board, businesses are tightening the management of cash flows, reducing discretionary spending, shelving capital projects, freezing recruitment and cutting non-essential marketing spend.

WHICH COMPANIES HAVE BEEN CUTTING?

Companies that have cut or postponed dividends in recent weeks include property giant British Land (BLND), Premier Inn owner Whitbread (WTB) and housebuilders Barratt Developments (BDEV), Persimmon (PSN) and Taylor Wimpey (TW.).

Historically, banking stocks have been key holdings for investors looking to generate income, but following a letter from the Prudential Regulatory Authority (PRA), the Bank of England’s regulatory body, the UK’s biggest banks have agreed not to pay any dividends this year and to suspend their share buyback programmes.

The move by the PRA followed guidance from the European Central Bank (ECB) that the continent’s banks should hold off from paying dividends until October at the earliest.

Barclays (BARC), HSBC (HSBA), Lloyds (LLOY), Royal Bank of Scotland (RBS) and Standard Chartered (STAN) were expected to pay a total of £15.6bn to shareholders in the form of ordinary and special dividends for 2019.

Yet having injected billions of pounds of liquidity into the banking system to help the banks to support the economy, the last thing the regulator wanted was banks using those funds to pay dividends to shareholders or engage in buybacks.

This now means £7.5bn of 2019 dividends are no longer going to be paid out and another £7bn of 2020 dividends, or half of the total pencilled in for this financial year, will also likely be withheld.

The positive news is that banks are much better capitalised and have much better balance sheets than in the global financial crisis. And by holding onto their 2019 and 2020 dividends, there is also less risk that they will need to come to the market to raise capital in order to offset asset write-downs and bad loans.

THREE POINTS TO CONSIDER

Chris Cummings, chief executive of the Investment Association, sees three key points in addressing the current dividend challenge. ‘First, we expect boards to be taking decisions on their dividends based on what is best for their business over the long term; they will have to decide if any dividend payment is sustainable in light of the current market conditions and business needs.’

Secondly, Cummings says investment managers would ‘certainly expect companies to follow the guidance of their regulator and have been supportive of companies that have stopped their dividend to retain much needed cash for the business so far’.

And thirdly, he stresses that ‘importantly, we should not lose sight of the crucial role of dividends for the wider economy, and the current situation should not be used as an opportunity to rebase or reduce the dividend unnecessarily. Shareholders would expect companies to restart them as soon as it is prudent to do so.’

ASKING SHAREHOLDERS  FOR MORE CASH

In these unprecedented times, companies are also going cap in hand to ask shareholders for more money rather than doling out cash via dividends.

For example, cruise operator Carnival (CCL), among the hardest hit by coronavirus, has announced an $8 per share equity raise as part of a $6.25bn rescue fundraising package. Transport hub food and drink seller SSP (SSPG) has raised new money to shore up its finances, as has automotive portal operator Auto Trader (AUTO), among many others.

Share buybacks have also fallen by the wayside. Companies ranging from educational publisher Pearson (PSON) to insurer Direct Line (DLG) have put their buyback programmes on hold. This makes perfect sense in the near term as it is a quick and easy way to preserve cash, and it is vital to give companies some breathing space as this could help save jobs.

It does also question the long-term value of buyback schemes as it could be argued that boardrooms have fallen into the trap of buying near the top of the market.

WHO HASN’T CUT DIVIDENDS?

Oil producer Royal Dutch Shell (RDSB) seems determined that it will keep paying dividends, in spite of the recent oil price collapse.

Its latest trading statement (31 March) provided updates on production volumes, capacity utilisation rates and an analysis of how sensitive cash flow from operations is to movements in the oil price – but no mention of the quarterly $0.47-a-share dividend. Instead, Shell simply highlighted its vast credit facilities, supplementing a $20bn cash pile and additional capacity to raise short-term debt, which seemed to indicate that the dividend is not under discussion.

Technology group Computacenter (CCC) on 12 March said it would pay a dividend in June. A week later power company ContourGlobal (GLO) also said it would keep paying dividends.

Heavyweight companies that are likely to give investors a steer on future dividends over the coming few weeks include AstraZeneca (AZN) and UDG (UDG) in healthcare, Halma (HLMA) and Electrocomponents (ECM) in the industrials space, and AVEVA (AVV), BT (BT.A) and Vodafone (VOD) from technology and telecoms sectors.

Then there are several eagerly awaited announcements to come from traditional income bellwethers such as United Utilities (UU.) as well as Compass (CPG) and Experian (EXPN) elsewhere.

Dividend confirmation from many of these companies will have the obvious effect of providing much-needed security and certainty for income investors, thereby putting them in favour with the market.

It might even see investors happy to pay a higher earnings multiple to own a stock if there is certainty over the income stream. However, investors must remember that dividends are never guaranteed and can be cancelled or cut at the company’s discretion.

SUPERFICIALLY ATTRACTIVE

At 5.9%, the FTSE All-Share’s trailing dividend yield has only been higher in mid-1940 during the battle of Dunkirk, according to investment bank Morgan Stanley, and again during the period between 1974 and 1976. That latter period was in the aftermath of the 1974 UK recession, which ultimately saw the UK needing an IMF bailout to dig itself out of its economic hole.

Looking back, such levels have historically represented good entry points, said Morgan Stanley.

But while the income case at the aggregate market level looks attractive, there are sizeable risks to single stock positions given the increasing number of companies cutting dividends meaningfully as free cash flow dries up and more companies enter cash preservation mode.

The average stock in the MSCI UK index currently yields 5.2%, according to Morgan Stanley, which compares to a long-run median value of 3.4%.

Simplistically, this may appear to be historically attractive to optimists, or could possibly point to cuts of 35% or so to future dividends as already being priced in by the market.

Analysts at Peel Hunt estimate that the total amount of cancelled dividends now tallies at more than £15.5bn.

POTENTIAL DIVIDEND CUTTERS

Morgan Stanley flags multiple UK and European stocks supposedly attractive to income seekers where future dividends are still at serious risk, thanks to high ratios among net debt-to-EBITDA, net debt-to-equity, short-term debt-to-total debt and low interest cover.

The list of stocks where dividends look to be at risk includes engineering firm Weir (WEIR), mobile network operator Vodafone, chemicals company Johnson Matthey (JMAT) and utility stocks SSE (SSE) and Severn Trent (SVT).

According to Peel Hunt, only around 40 companies out of the FTSE 350 and AIM 100 have committed to pay dividends currently, worth about £8.5bn of income. Utilities, oil and gas and healthcare companies are leading the way, while transport, media, travel and leisure and financial stocks are largely absent from this list.

There are around another 100 companies that have announced dividends, but have not yet confirmed they will still go ahead with the estimated £13.6bn of payments, says the broker. Inevitably there will be further cancellations.

FOUR STOCKS TO OWN FOR INCOME

While there are no guarantees that the following stocks will pay dividends as forecast by analysts, they have the right qualities for investors to be confident about the income stream.

National Grid (NG.) 854.2p

Millions of Brits may be stuck at home in lockdown but we all need power to run our TVs, smartphones and to keep the lights on. These ‘defensive’ qualities make electricity network utility National Grid (NG.) a reliable cash generator that should keep dividends on the up and up, as well as a neat play on the thematic switch towards a lower-carbon energy grid.

The company last week said it expected underlying earnings for the year to 31 March 2020 to match guidance provided in November, demonstrating resilience even in the face of the unprecedented coronavirus threat. That implies a dividend of 48.75p, according to Refinitiv consensus, rising to 50.1p this financial year, implying a 5.9% income yield.

The company still faces a US enquiry over service reliability, although management have firmly defended their record, while Artemis’s highly-rated fund manager Simon Edelsten remains a fan and shareholder through his Mid Wynd (MWY) investment trust.

British American Tobacco (BATS) £29.79

This tobacco titan is the name behind brands including Dunhill, Pall Mall, Kent and Lucky Strike and is trading on a 7.5% prospective yield.

Admittedly, it carries a high net debt load, while the defensive attractions of the tobacco sector, long prized for its earnings resilience, have lessened amid increasing political and regulatory concerns, lately over vaping.

Nevertheless, at the time of writing, British American Tobacco is yet to see a material impact from the COVID-19 pandemic.

It also hasn’t joined the ranks of companies cutting or shelving their shareholder rewards, having declared a 3.6% hike in the 2019 dividend to 210.4p.

The company is drawing confidence from its enviable cash generation – which underpinned a recent $2.4bn bond issue – as well as its diversity by geographic end market. This should help to smooth earnings and cash flows as some countries emerge from lockdown as others enter quarantine.

Interestingly, British American Tobacco is also playing a part in the fight against coronavirus. Its Kentucky-based biotech unit is working on a potential vaccine for COVID-19 using proteins extracted from tobacco leaves.

Henderson Far East Income (HFEL) 282.85p

Managed by Janus Henderson Investors’ experienced Mike Kerley, Henderson Far East Income (HFEL) seeks to provide a total growing annual dividend as well as capital appreciation from a diversified portfolio of 49 Asia Pacific investments. It currently offers an attractive 8% yield.

Kerley believes Asia will stand out as a relative beacon of stability for income investors given the large amounts of cash on balance sheets and the region’s lower dividend payout ratios.

In the UK, banks have been told not to pay dividends through the crisis. For Henderson Far East Income, the only foreign banks left in its portfolio are Macquarie, primarily an investment bank, wealth manager and infrastructure investor, and two Chinese names.

‘Banks in China are over 50% owned by the Ministry of Finance and have payout ratios of only 30%,’ explains Kerley, also invested in Samsung Electronics and China Yangtze Power, among others.

BBGI (BBGI) 168.45p

Yield-starved investors seeking predictable returns in unpredictable times should happily pay up to access the reliable income on offer from global infrastructure trust BBGI (BBGI).

The fund trades on a 23% premium to net asset value (NAV). That’s the price investors have to pay to access defensive attributes and dependable cash flows.

Experts at Winterflood argue the trust is in a strong position among its peer group to weather the COVID-19 pandemic.

Diversified by geography, the fund derives the entirety of its cash flows from government-backed ‘availability-based’ projects. Think roads – which the managers argue are simpler to manage than other social infrastructure assets – bridges, schools, hospitals and justice facilities.

These are infrastructure assets that citizens rely on day in, day out, to keep local economies moving.

Despite the current global shutdown, BBGI’s assets are 100% operational and should prove reliable in the looming international economic downturn. Put simply, BBGI would suit investors seeking dependable income but with very low risk.

Based on increased dividend targets of 7.18p and 7.33p for 2020 and 2021 respectively, BBGI offers an attractive, cash-backed yield comfortably north of 4% even after a recent spike in the share price.

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