The number of FTSE 100 companies which have raised their dividends in each of the last 10 years fell from 25 at the start of the year to just 14 at the end of June, according to analysis by AJ Bell.

Such has been the damage to company balance sheets during the pandemic that dividend payments by FTSE 100 companies this year are expected to be just £62 billion instead of £91 billion as forecast in January.

That leaves the FTSE on a 2020 yield of 3.6%, which may be more realistic than the indicated yield of 4.7% at the start of the year and is certainly a lot better than deposit rates but still carries some risk.

‘A second wave of the pandemic could cloud hopes for higher dividend payments in the second half of the year, especially as earnings cover is still thin and profit forecasts are still generally sinking lower,’ says AJ Bell investment director Russ Mould.

Earnings cover, or the ratio of earnings to dividends, has dropped to about 1.4 times since the beginning of the crisis, well below the level of two times which is generally regarded as sustainable.

There was some rare good news on dividends last week when property firm Land Securities (LAND) announced it would resume payments later this year, after it saw ‘encouraging’ levels
of footfall at shopping centres which reopened last month.

However, there are still plenty of companies continuing to deliver disappointing news to shareholders including packaging group DS Smith (SMDS) and tech firm Micro Focus (MCRO), both of whom recently said it was too early to start resuming dividends.

Henderson International Income Trust (HINT) sees global dividends falling between 15% and 34% this year, more than during the global financial crisis, after rising 8.7% last year.

In 2019 the trust reported that over 20% of global dividends (£230 billion worth of payments) were at risk of being cut. By May 2020, 40% of the companies it identified as ‘traps’ had cut their dividends, including BT (BT.A) and Royal Dutch Shell (RDSB).

Fund manager Ben Lofthouse says: ‘The current recession is unusual because it is happening in almost all parts of the world at the same time and because it is so sudden. Normally in a recession, companies would flex their dividend cover target and dividends would reduce much less than profits, protecting shareholder income.

‘So far, the decline in dividends looks set to be similar or worse than the decline in profits, meaning companies are protecting their balance sheets to see them through the crisis. This will allow them to emerge stronger’.

Disclaimer: AJ Bell is the owner and publisher of Shares magazine. The author Ian Conway and editor Daniel Coatsworth own shares in AJ Bell.

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