The dividend tide went out – but is slowly flowing back


The onset of CV19 has had a visible impact on share prices, but the more immediate damage to many investors has come through the decimation of dividend income. The gradual reinstatement of dividend payments we are seeing now should provide some level of comfort to investors.

As companies began announcing how they would deal with CV19, protecting liquidity came to the fore, and for many an inevitable squeeze on dividends began. A widespread cancellation of dividends across the FTSE gathered momentum quickly and resulted in trusted dividend payers abandoning prior policy and suspending, or curtailing, payment until some uncertain date in the future. Notable for dividend munchers was that the banks suspended dividends and even Shell cut its dividend for the first time since WWII.

While this was a necessary precaution, it has compounded the agony of a damaged share price for many investors with a subsequent impact on income. The growing band of pensioners reliant on SIPP income for day-to-day living have been hit hard. For some, income has fallen from a comfortable 3% yield to nil over a very short period. There has been no furlough allowance for pensioners, so for those short of income, the cut in dividends was followed by a capital sell-down, starting with highly-liquid stocks, and ensuring the FTSE continued falling.

The Kestrel Opportunities Fund (KOF) entered 2020 with 40% of investee companies paying dividends and others scheduled to enter the dividend list in 2021. The majority of investee companies pulled their final dividends payable in 2020 as a CV19 precaution, with only one keeping to its existing payment policy.

The KOF portfolio responded well to the severe stress test of the first wave of CV19 and by October 2020, all those suspended looked to be back into a payment regime, including for some the payment of special or interim dividends to make up for the missed final. By 2021, indications to date are that we should see dividends back at pre-CV19 levels, with some new joiners to the list following recoveries across 2019 and 2020.

The payment of dividends is an important indicator of company wellbeing, since both cash and profits are required. Dividends provide a useful contribution towards a fund’s total return over time, as well as a deeper and more subtle insight into the true ability of a company to make payment, and a Board’s level of comfort in doing so.

Firstly, if the company seeks to change its dividend policy, or in extremis fails to make payment, then shareholders will be the first to know. Contrast this with a company failing to pay suppliers, when shareholders may be the last to know. The information is first-hand and high quality.

Secondly, listed company directors are rightly cautious about paying dividends they cannot afford, since doing so creates a personal liability. Dividend payment is a matter for the whole Board, including Non-Executives – compared to the payment of suppliers, which is a matter for just Executives. This collective level of responsibility enhances the quality of information gleaned from a dividend policy. Even a small dividend can provide an underlying level of comfort and for some investors, income, however small, is an incentive to hold the shares in the first place.

 

Disclaimer

The information contained in this research article is proprietary to Kestrel Partners LLP (“Kestrel”) and all content is subject to copyright with all rights reserved. Kestrel is authorised and regulated by the Financial Conduct Authority (authorisation number 503303).

This article does not constitute or form part of any offer or invitation, or a solicitation of any offer, for the purchase or acquisition of securities, or any interest in securities, by Kestrel or any other person and no legal relations shall be created between Kestrel and the recipient as a result of its distribution.

No representation or warranty, express or implied, is or will be given by Kestrel (or any of its related persons, being any members, shareholders, officers, employees, advisers or agents) and, without prejudice to any liability for, or remedy in respect of, fraudulent misrepresentation, no responsibility or liability or duty of care is, or will be, accepted by Kestrel or any of its related persons as to the fairness, accuracy, completeness, currency, reliability or reasonableness of this article or any opinions contained within it. Neither Kestrel nor any of its related persons accepts any responsibility for updating any of this article, correcting any inaccuracies within it or for providing any further or supplemental information to any person.

Recipients should not construe the contents of any of this article (or any discussions relating to it) as legal, tax, regulatory, financial, investment, accounting or any other form of advice or as a recommendation by Kestrel. Accordingly, no reliance may be placed upon any contents of this article by the recipient.


Back to News