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Are UK Dividends Safe?

Not all of them

The pace of the Covid-19 2020 downturn has put company revenues, payroll, tax, debt servicing and fixed cost obligations under the spotlight.

The pressing issue is liquidity, how much cash does the company have access to? How much cash is needed to get over Covid-19?

Going into the Covid-19 problem, UK corporate cashflows were generally being optimized to maximise shareholder payments, make acquisitions, fund capital expenditure. But now companies must hunker down and delay capital decisions.

UK corporate cashflows are under severe pressure and facing an open-ended period that will see extra costs from business disruption, far lower revenues, declining profits and an intensifying competitive environment. Companies are likely to cut discretionary capital spending (including dividends) first, delay M&A plans and delay upfront corporate restructuring decisions.

Dividend payouts are an issue, but from a corporate viewpoint a relatively low priority one. Some stocks are indicating ‘risky’ 10%-17% dividend yields, when referenced to the old world of 2019. We expect 2020 will see significant payout changes / dividend deferrals/ scrip alternative offers as companies conserve cash.

Shareholders are not going to be pressing boardrooms in this strained environment, they have the same priorities, that the company gets through this tough, low revenue period with minimum debt accumulation and without too much permanent damage. No company wants pay shareholders out of scarce funds before having to draw on government financing shortly thereafter.

The sell-off has increased UK equity market ‘yields’, investors require higher yields and are placing a higher discount rate on payment expectations.

Company FY19 Annual Dividend

DY (%)

20 March 2020

DY (%) 31 Dec 2019 Δ Change
Barclays 9p 10.0% 4.9% 5.2%
BATS 210.4p 8.1% 6.4% 1.7%
BHP Group US$1.33 10.2% 6.3% 3.9%
BP 42 cents 13.6% 7.4% 6.2%
Carnival Corp US$2.00 21.3% 4.7% 16.6%
Easyjet 43.9p 7.4% 3.1% 4.3%
Glencore 20 cents 14.0% 7.1% 6.9%
HSBC 51 cents 8.6% 7.2% 1.3%
IAG 60 cents 26.3% 8.2% 18.1%
Legal & General 16.21p 10.6% 5.2% 5.4%
Lloyds Banking 3.26p 10.5% 5.1% 5.4%
Royal Dutch Shell US$1.88 15.1% 7.1% 8.0%
RBS 25p 22.0% 10.2% 11.8%
Vodafone 7.1p 6.0% 4.8% 1.2%

Source; CSS Investments Ltd

 

Dividend yields have surged during the sell off (from end 2019) – the selection of UK blue chips (above) have underperformed UK indices, which has moved from a 4.5% dividend yield to c. 7.25%.

Dividend growth over 2020 is a moot point at this stage. When viewed with the cash cost of dividends v free cash flow a clear picture emerges.

Company Dividend Cost Free Cash  Flow COMMENT/ VERDICT
Barclays £1.55bn Stable CEO Jes Staley, subject of FCA probe promised 9p, hence high risk / CUT
BATS £4.8bn Stable BATS wants to keep the payout despite structural problems / HOLD
BHP Group US$2.8bn Negative BHP will post lower oil revenues but iron ore, copper is stable/ HOLD
BP US$8.5bn Negative Cashflows under intense pressure, given Brent <$30/ bbl / CUT
Carnival Corp US$1.39bn Negative Revenues under intense pressure over Q2, Q3 / CUT
Easyjet £174m Negative Revenues under pressure, EZJ paid 2019 dividend, but in 2020? / CUT
Glencore US$2.66bn Negative Expect GLEN to maintain dividend largely funded by debt/ HOLD
HSBC US$10.36bn Stable Low US rates will hurt NIM, but payroll savings will fund payout/ HOLD
IAG €1.29bn Negative Revenues under intense pressure, expect dividend cut/ CUT
Legal & General £1.05bn Negative Business will be impacted by bulk annuity demand, but dividend HOLD
Lloyds Banking £2.37bn Negative Board likely to hold dividend at current levels/ HOLD
Royal Dutch Shell US$14.7bn Negative Cashflows under intense pressure, share scrip alternative is likely/ HOLD
RBS £3.03bn Negative NIM under severe pressure/ CUT
Vodafone £1.9bn Stable Board cut dividend prior to crisis hence expect dividend / HOLD

Source; CSS Investments Ltd

There is a “the more the merrier” aspect to this, so far Berkeley Group has cancelled its 400p special payout to conserve cash, Crest Nicholson cancelled its dividend the day it went XD (the first time I can recall this occurring). National Express said its dividend was under review ahead of ex dividend on 23rd April 2020.

Conclusion

Clearly the longer this environment persists, the higher the risk to payouts. Investors may be a bit in denial about the potential for dividend cuts over 2020. There is ample scope for surprises on dividends as cashflows are repositioned or as boards make decisions on drawing down government funding.

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Key to Material Interests:

Please be aware that the following disclosures of Material Interests are relevant to this research note:

Company NameRelevant disclosures: (2)

Please be aware that the following disclosures of Material Interests are relevant to this research note:

Barclays                                                              Relevant disclosures:   <1,2>

BATS                                                                    Relevant disclosures:   <2>

BHP Group                                                         Relevant disclosures:   <2>

BP                                                                      Relevant disclosures:   <2>

Berkeley Group                                               Relevant disclosures:   <2>

Crest Nicholson                                               Relevant disclosures:   <2>

Carnival Corp                                                     Relevant disclosures:   <2>

Easyjet                                                              Relevant disclosures:   <2>

Glencore                                                               Relevant disclosures:   <1,2>

HSBC                                                                   Relevant disclosures:   <1,2>

IAG Group                                                         Relevant disclosures:   <1,2>

Legal & General                                                 Relevant disclosures:   <2>

Lloyds Banking                                                  Relevant disclosures:   <2>

National Express                                               Relevant disclosures:   <2>

Royal Dutch Shell                                              Relevant disclosures:   <2>

RBS                                                                     Relevant disclosures:   <2>

Vodafone Group                                                Relevant disclosures:   <2>

  1. The analyst has a personal holding in the securities issued by the company or of derivatives linked to the price of the company’s securities.
  2. Collins Sarri Statham Investments Ltd has clients who hold either shares or CFD positions in this security.

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