It’s been a dismal year for UK dividend seekers so far, with a flurry of companies cutting or suspending their payouts. While cuts have slowed to a trickle now, Royal Mail (RMG) is the latest large income payer to make drastic changes to its dividend policy: in late June it rattled investors by cancelling payouts for the whole of the current financial year.
With second quarter earnings season looming, there are fears those companies that haven’t yet cut will do so as the full extent of the economic shutdown is laid bare. Still, there is some light at the end of the tunnel: FTSE 100 real estate investment trust Land Securities (LAND), which owns offices, shopping centres and retail parks, will resume dividend payments in November.
This month we have revamped our regular dividends article to expand the range of criteria we use to include expected dividend yield (which factors in current and future cuts) as well as dividend cover (a ratio used to show whether a company can afford to make its income payouts). We have also looked back over 10 and 20-year periods using Morningstar and Pitchbook data to see which companies have a track record of maintaining dividends.
Twenty UK companies make the cut, and they all have narrow or wide economic moats. Wide moat names include Unilever (ULVR), GlaxoSmithKline (GSK), Diageo (DGE) and Reckitt Benckiser (RB.), all notable income payers that have not cut their dividends this year. Of these companies, Diageo particularly stands out as is the only company that has not cut its dividend over a 20-year period.
Global advertising firm WPP (WPP) has the highest expected dividend yield in the list, clocking in at a hefty 9.5% even after a cut to its payout in March. The company’s share price has fallen 43% this year as companies scale back their spending on advertising, events and sponsorship. And as share prices and yields move in opposite directions, it’s inevitable that the firm’s yield would move substantially higher as its share price plunges.
And, while WPP has the highest expected yield on our list, it also has the lowest dividend cover ratio of 1.3 times earnings. Dividend cover matters because it shows how much of a company’s profit is used to pay dividends. A ratio of 1 means all annual earnings are used to pay shareholders, whereas 2 is in normal times considered a comfortable ratio – in effect, a firm can pay dividends twice over from annual profit.
Dividend Cover Matters
The average dividend cover across the FTSE 100 is currently just 1.4 times earnings, which AJ Bell investment director Russ Mould calls “stubbornly thin”, even factoring in an economic downturn this year and recent dividend cuts. Still, this could suggest that companies are expecting a rebound in profits later this year and next, which would move the dividend cover back up closer to 2.
Of the twenty companies in our list, 13 have a dividend cover of 2 and above, and one, mining company Evraz (EVR), has an enviable dividend cover ratio of more than 6.
WPP’s 9%-plus yield is also an outlier on our list when most companies pay between 2 and 4%. Yield expectations have been revised sharply lower as this year’s cuts are factored. At the beginning of 2020 the FTSE 100 was expected to yield around 4.7% for the year, but that estimate has since fallen to 3.6%. Yet the potential alternatives – cash and bonds – are much worse in terms of yield, investment trust managers note.
While 2020 has been tough this year for income seekers, quality companies should bounce back, says Ben Lofthouse, manager of the four-star rated Henderson International Income Trust (HINT). “Investors should remember that a temporary halt in dividends does not change the fundamental value of a company – that is driven more by the ability of the company to flourish and grow over the longer term. If retained or newly issued capital is no longer needed as the crisis passes, it will find its way back to shareholders.”