At the time of writing more than a quarter of the FTSE 100 index has elected to defer, cancel or cut their final dividends for 2019 or interim dividends for their next fiscal year.

Perhaps the biggest blow to income seekers has come from the banking sector, where the Prudential Regulatory Authority made it clear that neither dividend payments nor buybacks from Barclays (BARC), HSBC (HSBA), Lloyds (LLOY), Royal Bank of Scotland (RBS) and Standard Chartered (STAN) would be seen in a good light.

That cancelled £7.5bn of dividend payments for 2019 and put on ice forecasts of £15bn in further distributions for 2020. These are significant numbers when investors consider that at the start of March (before the coronavirus outbreak really began to hit home) the analysts’ consensus for aggregate dividend payments from the FTSE 100 in 2019 was £89.5bn (and £93.5bn including special dividends). Analysts had pencilled in £91.5bn for 2020, before any one-off distributions.

The degree of dividend cuts could become even more acute, depending upon two factors. The first is the duration of the current lockdown and social distancing policies and the shape of the anticipated recession and subsequent economic recovery. The second is the weight of political and public opinion. The former is very hard to forecast.

It may be even more difficult to gauge the impact of the latter, although it may be best to prepare for the worst and hope for the best, at least from the narrow perspective of portfolio investment, because no sooner has the PRA had its say at the banks than the European Insurance and Occupational Pensions Authority (EIOPA) has begun to apply similar pressure to UK’s and Europe’s quoted insurers.

At the time of writing, Aviva (AV.) and RSA (RSA) have confirmed they won’t be paying dividends near-term. Among the FTSE 250 insurers, Direct Line (DLG) and Hiscox (HSX) have also paused dividends. Legal & General (LGEN) is the only one to say in recent weeks that it still intends to keep paying dividends; we’re simply waiting for the rest to update the market.

Sums at stake

Were all seven FTSE 100 firms who are classified as life or non-life insurers by index-compiler FTSE to comply with EIOPA’s requests to cancel their second-half dividends, this would take another £2.9bn of anticipated income away from investors.

It would also put in play some £4.5bn on dividends expected in 2020.

The issue does not appear to be the insurers’ ability to pay. Applying EIOPA’s own Solvency II ratio, which measures how much capital insurers have to hold to be confident they can withstand a worst-case loss scenario, all of the seven FTSE 100 firms appear well buttressed.

Following the demerger of fund manager M&G (MNG), Prudential (PRU) no longer falls under the EIOPA’s purview and it is now regulated by the Hong Kong Insurance Authority, but the company carries a sizeable surplus relative to the Local Capital Summation Method and is therefore also in the clear, at least on paper.

Regulatory pushback

This does not seem to be enough to persuade EIOPA, rather as the Big Five banks’ regular clean bill of health relative to the Bank of England’s stress tests and improved Tier 1 capital and leverage ratios did little to throw the PRA off their scent when it came to reining in dividends and buybacks.

The EIOPA, like the PRA with the banks, wants the insurers to keep the capital as an extra buffer against potential losses relating to coronavirus and the associated economic downturn.

A further similarity is that insurers, like banks, do not always feature prominently in lists of companies most admired by the public. Paying out large amounts of cash to shareholders when tales of refusal to pay out those hit (yet again) by floods or whose livelihood has been destroyed by the lockdown is not necessarily a good look. By contrast, it is a good look for regulators and politicians to take a tough line even if, with plenty of justification, the insurance industry can say it did not need the taxpayer bailouts that the banks hoovered up during the great financial crisis of 2007-09.

This is a new, variable element for income-seekers to address and it is one of several potential long-term implications of the coronavirus crisis and policy response to it, as and when we (hopefully) begin to shake it off.  This column does not have the answers, alas, but investors might like to consider the following issues as they prepare their long-term asset allocation plans:

• Increased government involvement could mean more regulation and greater emphasis upon returns for stakeholders (employees) relative to shareholders.

• Increased public appreciation of those who have worked in stores or warehouses or supply chains and kept the show on the road could also mean increased pressure for improved salaries and conditions for the lower-paid – especially if firms focus on more local supply chains and reduce their reliance on global ones, further tightening the labour market over time.

• This could all mean lower returns on capital, lower payouts and potentially lower trend total returns for investors. Share buybacks in particular will surely come in for greater regulatory scrutiny.

‹ Previous2020-04-09Next ›