Almost a third of FTSE 100 take axe to dividends

Almost one-third of FTSE 100 companies have cut or scrapped their dividends during the coronavirus crisis, leaving investors relying on 10 companies for two-thirds of the index's likely payouts in 2020, research shows.

Smurfit Kappa and Ferguson were the latest FTSE 100 companies to withhold their next scheduled dividend payments on Wednesday. Their announcements took to 32 the number of leading companies that have cut, deferred or cancelled shareholder payouts to save cash in the crisis, according to AJ Bell.

Other big companies to scrap dividends include the UK's banks, including Lloyds and Barclays, and insurers Aviva and RSA, all under pressure from the Bank of England. ITV, WPP, Smiths and Whitbread are also on the list of non-payers along with companies such as Ocado and Just Eat whose policy is not to pay dividends, taking the tally to 36.

Companies that have bucked the trend include Tesco, Diageo and Legal & General, which have all declared their intention to pay their scheduled dividends. Shell and BP, the two biggest payers, have set out plans to preserve liquidity without mentioning their dividends, suggesting the oil giants intend to pay out.

Shell, BP, Diageo and seven other companies are forecast to pay out £42bn in dividends, or 66% of the total assuming those that have already cancelled pay out nothing in 2020, AJ Bell said. The seven companies are British American Tobacco, GlaxoSmithKline, Rio Tinto, AstraZeneca, Vodafone, BHP and Imperial Brands.

But these companies have not published firm intentions to pay dividends, keeping investors guessing. If they all meet forecasts and no other companies pay dividends the FTSE 100 will yield 2.7% in 2020, AJ Bell said. If 20 companies, including Legal & General, Unilever, Prudential and BT pay out their forecast £49bn the index will yield 3.1%.

"As income-seekers do their research as to what the yield on the FTSE 100 might be in 2020, they can cut the field down pretty quickly when it comes to which firms now really matter," Russ Mould, AJ Bell's investment director, said. “The starting point that a third of the FTSE 100’s members make no dividend payment at all offers some sort of downside protection so attention must then focus on the largest payers."

Only five of the top 20 have forecast dividends covered twice by earnings and none of the top 10 meet that threshold. Many of the biggest payers are well short, raising questions about their reliability at a time of crisis. Investors have told companies to defer dividends in the crisis if that is needed to preserve the company's long-term future.

Companies may also face political and reputational pressure to scrap dividends if they make use of business rate holidays, delayed VAT payments and other taxpayer support. Tesco appears intent on pressing ahead with its increased dividend despite criticism for accepting £585m in business rate relief.

"Investors will therefore have to keep doing their research on these 20 firms in particular if income is their primary aim," Mould said. "Their analysis will need to take into account any assistance received during the current crisis and how front-line staff are being rewarded for helping to keep the show on the road."

The Investment Association has encouraged companies to look after employees and suppliers when deciding on the level of dividend to pay, in line with pressure to consider wider society and think long term during the crisis. But the association, which represents almost £8trn of assets, also stressed the importance of dividends for individual savers and pensioners, charities and pension funds.

Emma Wall, head of investment analysis at Hargreaves Lansdown, said some fund managers were urging companies to take the pain of a dividend cut now to put them in a stronger position to reinstate payouts when the crisis eases.

Wall said: “We have already seen some dividend cuts in the UK, and we expect more companies to announce changes to expectations in the coming weeks and months even if these cuts are purely precautionary."