Hurray! Dividends are back on the menu again
More than £2.2 billion of dividends will now be paid by London-listed companies which previously halted payments during the pandemic. The figure relates to dividends declared since the start of July and includes six companies in the FTSE 100.
This sends a very strong message to the market that companies are regaining confidence and that the sharp drop in dividend income we saw earlier this year may turn out to only be a short-term phenomenon.
A lot of companies decided not to make dividend payments in the first half of the year, citing the need to preserve cash and bolster working capital during the early stages of the health crisis.
Some companies are now going back and not only paying the dividends that were skipped earlier this year, but also paying further dividends relating to the first half of their current year. Falling into this camp are the likes of insurer Direct Line (DLG), packaging group Mondi (MNDI), defence group BAE Systems (BA.) and shipping services provider Clarkson (CKN).
While some companies are reinstating dividends previously expected by investors, this isn’t a wholesale game of catch-up when it comes to the amounts paid out.
Domino’s Pizza (DOM) is about to pay the previously deferred final dividend for its 2019 financial year but is sitting on its hands as to how much cash it will pay out to shareholders for the current financial year. Shareholders will have to wait until March 2021 to find out.
Many investors are drawn to the life insurance sector for income and they will be pleased that Aviva (AV.) is paying dividends again, even if the payment is only a fraction of what they would have got under normal circumstances.
For most, it’s a case that investors will miss out completely on final payment for 2019 financial year and the resumption of dividends only really applies to the H1 2020 payment. Stocks in this situation include construction group Hill & Smith (HILS), pharmaceutical services provider UDG Healthcare (UDG), pawnbroker H&T (HAT:AIM) and chemicals firm Zotefoams (ZTF).
Investors should take some reassurance from the companies that are resuming dividends as they wouldn’t be paying unless they are very confident about their prospects. It would be extremely embarrassing to have to stop dividends again and no board of directors will have taken the latest dividend decision lightly.
Resuming dividends can still come with a catch, namely the opportunity to introduce a less generous dividend policy. It certainly looks like Aviva is going to downgrade its payments in the future, judging by comments its latest results.
Lower dividends payments could benefit a company if it frees up cash that can be reinvested in the business and make it more competitive for the future. This in turn could drive capital gains for investors, potentially exceeding the returns they may have enjoyed from historical dividends.