Robin Geffen

How to maintain dividends in the current market

Robin Geffen

The spread of Covid-19, the lockdown and the consequential economic impact have accelerated a trend that have we been warning clients and investors about for the past year. This is the fact that some very high yielding companies in the UK have not had the earnings capacity or dividend cover to support their levels of income.


The companies at risk of dividend cuts have included many of the traditional income stocks. We predicted that unless operational performance improved, which would require significant capital expenditure, such companies would not be able to maintain their dividend levels.


We believed before Covid-19 that many companies would cut dividends in 2020 and the pace has subsequently accelerated. Now we are not just seeing dividend cuts but whole dividends being removed. In the first quarter of this year, 153 companies in the FTSE All Share cut their dividends and that number has been rising in April. In March alone, there were more than £1 billion in dividend cuts and these included household names such as Barclays, M&S, ITV and Lloyds Banking Group.


Not only do dividend cuts mean that investors in these companies suffer a loss of income but there is also generally a negative impact on their capital values. The share prices of those companies that cut dividends in the first quarter fell by an average of 45.2%. This was more than the index lost in value. Also, those companies with dividend cover of more than 2x outperformed those with cover of between 1x and 2x.


We believe that the dividend cuts will inevitably be followed by some hefty rights issues that will substantially dilute shareholders’ stakes in deep value and low-quality companies that have or are going to run out of cash. We will see some very deep discounted rights issues.  


Certain sectors will be challenged, notably industrials, airlines, leisure stocks, hotels and retailers. But there will be winners even in the most difficult sectors like retailers: a food retailer with good logistics like Sainsbury’s is doing very well for example.


One sector we do like is technology because these companies will be the dividend payers of the future. Around the world, the technology sector has outperformed broader stock market indices since the coronavirus pandemic started hitting markets. This is not a new trend, but the acceleration of the critical role that technology plays in disruption which we have been seeing and investing in for a number of years.

This disruption is changing everything from the way that we work, to the way that we shop and spend our leisure time. Many of us are now working remotely from home and rely on Microsoft’s Azure or Amazon’s AWS service for cloud computing. We are shopping increasingly online using Amazon and food retailers like Sainsbury’s for deliveries, rather than going shopping.

This also means we are increasingly using Visa and Mastercard credit and debit cards to pay for online purchases. This trend is also accelerating when we go shopping on the High Street. Boots and other shops will no longer take cash, for fear of contagion, further increasing use of Visa and Mastercard cards. Internet security has also become more important in this New World as online fraud accelerates, following the money online. Evidence of greater use of credit cards on the High Street is shown by the maximum contactless payment rising from £30 to £45.

These fundamental changes will lead to a reappraisal of technology companies by those who don’t currently own them. Some technology companies like Microsoft, Visa, Mastercard and Apple already pay dividends, making them attractive to both Income investors and Growth investors. It is only a question of time before other technology giants like Amazon and Alphabet, which generate enormous amounts of cash, start paying dividends too. The world is changing faster now and it’s important that investors don’t miss out on these changes.

For a comprehensive list of common financial words and terms, see our glossary here.


Key Risks

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. Investment in funds managed by the Global Equity (GE) team may involve investment in smaller companies - these stocks may be less liquid and the price swings greater than those in, for example, larger companies. Investment in funds managed by the GE team may involve foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The team may invest in emerging markets/soft currencies or in financial derivative instruments, both of which may have the effect of increasing volatility. Some of the funds managed by the GE team hold a concentrated portfolio of stocks, meaning that if the price of one of these stocks should move significantly, this may have a notable effect on the value of that portfolio.


The information and opinions provided should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.

Friday, April 24, 2020, 9:22 AM