Scrapped dividends near £20bn as Covid-19 hits payouts

With almost £20bn of dividends wiped out so far in 2020, boards are grappling with whether to make payouts to shareholders or conserve cash during the Covid-19 crisis.

Tesco increased its final dividend on Wednesday and indicated its intention to maintain payouts during the crisis. By contrast, insurers Aviva, RSA, Direct Line and Hiscox cancelled their final dividends under pressure from the Bank of England in moves that left shareholders more than £1bn worse off.

The insurers' coordinated announcements leave Legal & General standing out in the sector after it said on Friday it would pay a final dividend worth £754m having considered the request from the BoE's Prudential Regulatory Authority. Other insurers such as Prudential and Admiral have not announced their plans yet.

So far in April £4bn of dividends have been scrapped and in 2020 the figure is £19.3bn and counting, according to AJ Bell's calculations.

The Bank of England also twisted the arms of Britain's banks, which reluctantly agreed to scrap £7.5bn of final dividends on 31 March. The decision left Hong Kong holders of HSBC shares so irate that some are organising in an attempt to overturn the decision.

Regulatory pressure, politics, investor demands and public opinion are all in the mix as boards try to decide whether to pay out large sums to their shareholders when the country is meant to be pulling together in a national emergency.

Tesco sought to defend paying £635m to shareholders while taking £585m of business rate relief from taxpayers. Britain's biggest retailer began its results statement with information about its efforts to "feed the nation", keep staff and customers safe and support food banks and other community causes. The total cost of the crisis, including hiring 45,000 extra staff, could approach £1bn it said.

“This combination of regulatory intervention and greater public awareness of the issue of dividend payments is a new, variable element for equity investors and income-seekers to address," Russ Mould, AJ Bell's investment director, said.

The controversy surrounding dividends during the crisis was highlighted at easyJet, which asked for taxpayer assistance and has borrowed from the government during the crisis. The airline paid out £171m in dividends in March, including £60m to its billionaire founder Stelios Haji-Ioannou.

But dividends are important to individual savers and pensioners, who often rely on the payouts for income, as well as pension funds that provide for workers when they retire.

Tesco and the insurers announced their dividend decisions on the day the Investment Association issued guidance to companies during the Covid-19 crisis. The association, which represents investors with about £7.7trn of assets, said shareholders would understand if businesses had to conserve cash but it underlined the importance of payouts to wider society.

"Shareholders would expect companies who do decide to suspend to restart the dividend payments as soon as it is prudent to do so," Andrew Ninian, the association's governance head, said in a letter to FTSE 350 chairmen.

The crisis could reignite a debate about the purpose of companies and who gets what in society. These questions were raised after the financial crisis as workers' incomes were squeezed while companies paid out to investors and top executives.

Share buybacks, which already had a bad press, may well be frowned upon after accusations that companies weakened their finances before the crisis by buying back stock to increase investor returns.

AJ Bell's Mould said public support for low-paid workers in warehouses, shops and supply chains could lead to pressure for higher wages when the crisis subsides – at the expense of shareholders. The government, whose avowed aim is to "level up" society, could also get involved to direct more money to employees relative to investors, he said.

"Whatever the length of the Covid-19 lockdown and the duration of the subsequent economic downturn, this debate may be one of their longest-lasting effects," Mould said.