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Dividend cuts are painful, but prudent

As the Covid-19 health crisis keeps consumers locked in their homes, many companies are preserving cash by reducing or scrapping dividends. Unfortunately, this trend looks set to continue.

As the Covid-19 health crisis keeps consumers locked in their homes, many companies are preserving cash by reducing or scrapping dividends. Unfortunately, this trend looks set to continue.
Garry white employee

by
Garry White

in Features

03.04.2020

Britain’s biggest banks didn’t really have a choice when they recently scrapped their dividends en masse. The Prudential Regulation Authority (PRA), the regulator appointed by the Bank of England to supervise financial institutions, was clear they should not be made.

As Britons stay at home to try and stop the spread of Coronavirus, the PRA advised banks to scrap all outstanding dividends from 2019 – and suspend all further payments in 2020. It did this to guarantee that UK banks have sufficiently high levels of cash that they can lend to businesses struggling from the current health crisis.

Given the unknown duration and future scope of restrictions on movement, the regulator’s decision was appropriately prudent. The lockdown has caused a cash crunch at many companies already. Businesses as diverse as local garden centres and global airlines have all seen their revenues dry up, but they still have the bills to pay.

This sharp economic shock, coupled with uncertainty around the length of the restrictions, has prompted many companies to make similar decisions to those taken by the PRA. Many have decided that cutting dividends to build-up a financial war chest is the sensible, prudent thing to do.

UK companies already announcing a cut or freeze in their payments include ITV, Halfords, Marks & Spencer, Stagecoach, Kingfisher and InterContinental Hotels. There are many others that have already followed suit – and we expect many more will do the same in the coming weeks and months.

As well as limiting the movement of people to prevent the virus spreading, governments have also stepped in to support the earnings of workers who have seen their incomes drop. It’s part of a plan to get people and companies through the crisis, with as little economic damage as possible.

All of this means that the income generated from equity portfolios will fall sharply this year. Whether these payments will be fully restored next year remains uncertain, as any industry bailouts are likely to come with caveats, which may or may not include limits on payments to shareholders. The scale of the damage to equity income will be determined by the duration of the health emergency and whether measures introduced by governments weigh heavily on particular industries.

At Charles Stanley, we know that holding a global, diversified portfolio is a good way to mitigate risk. As the investment outlook is now uncertain, it’s more important than ever that your portfolios continue to meet your needs and circumstances. For some clients who rely on pension drawdowns or equity dividends to top-up their income the current market uncertainty may be a worry. Your Charles Stanley investment manager is following developments closely and will, where appropriate, make adjustments to your investments. He or she are always on hand by phone or email to discuss any changes to your needs or circumstances as well as the composition of your portfolio.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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