Fund managers spot recovery signs for income-paying UK equities

Estimates suggest the Covid-19 pandemic wiped around 40% off the value of dividend payments to shareholders across the UK stockmarket, as companies slashed, cancelled or deferred distributions.

The moves were widely supported by asset managers, as some firms looked to strengthen their balance sheets and others were forced by regulators to preserve capital.

With a world-leading market yield a key reason to own UK stocks, the lowering of this has compounded underperformance of the market not seen since 2016's Brexit referendum.

A halving of oil major BP's dividend, the first time it has cut the payout in a decade, and the scrapping of miner Glencore's last week suggested more pain was to come for income investors.

However, UK equity income fund managers have pointed to more positive announcements in the past couple of weeks.

Laura Foll, manager of Lowland Investment Company said defence firm BAE Systems, car insurer Sabre and industrial company IMI had committed to distributing dividends that had previously been suspended by the end of 2020. "It is great to see announcements like that," Foll told clients.

"Back in March/April time, there was a pretty standard template that came out from companies of 'the health and safety of our employees is the number one priority and we have suspended the dividend'.

"That was pretty consistent, except for very defensive sectors like utilities and pharmaceuticals. What we are seeing now are some tentative signs of companies coming back to paying dividends.

"It is early days, but at least we are starting to see some companies come back to the [dividend] list, which is great. It feels like we are now starting to come out the other side of that period of very steep dividend cuts."

'Encouraging news'

Allianz Global Investors' Simon Gergel agreed, claiming "the big story" for UK investors now is that "you are starting to see those dividends come back".

"Yes, BP cut, but that, though maybe not 50%, was widely expected," Gergel, who manages the £400m Merchants Trust, explained.

"In the last week, we saw BAE Systems, which is a very big dividend payer and a company we own some of, reinstated their 2019 dividend; Keller, which is a ground engineering business, has reinstated its dividend; and a number of car insurance companies like Sabre and Direct Line have reinstated dividends that they have previously cancelled or put on hold.

"So, the news is actually moving on and that is quite encouraging. Yes, we are seeing a very significant cut this year, but equally companies have improved their balance sheets, their cash positions are better, they are getting a bit more visibility on the outlook, and so they are talking more optimistically about either reintroducing or maintaining dividends.

"So, those dividends could come back a bit quicker than we think."

Gergel said a conversation with Barclays revealed the bank was assessing when it could pay once more, while Wise Funds' Tony Yarrow added Standard Chartered reassured investors it would reinstate its dividend as soon as regulator the Financial Conduct Authority permitted it to do so.

Other stocks in Yarrow's Wise Multi-Asset Income fund like housebuilder Taylor Wimpey, industrial firm XP Power and Palace Capital have resumed payments.

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• Topics
• Equities
• Lowland Investment Company
• Simon Gergel
• Allianz Global Investors
• Merchants Trust
• Tony Yarrow
• Brendan Gulston
• Gresham House UK Multi Cap Income
• dividends
• Covid-19
• coronavirus
• UK Equity Income
• UK equities
• Laura Foll