04 May 2021
As we pass the first anniversary of the onset of the COVID-19 pandemic and the unprecedented changes to daily life that have now become familiar, it feels appropriate that we assess performance of public companies and markets over the course of the momentous and sometimes tragic year that we have just experienced.
Link Group has been producing their Quarterly Dividend Monitor for more than 10 years providing unique insights into the income distributions by listed companies since the global financial crisis. The most recent edition looked at dividends in the first three months of 2021 but also reflected on the full twelve month’s duration of the crisis.
Exactly one year ago, an initial trickle of dividend reductions in the first couple of days of April quickly became an unprecedented flood of cuts and cancellations. The final tally shows that dividends fell 41.6% on an underlying basis, excluding special dividends, in the twelve months to the end of March 2021. The biggest impact was felt immediately in Q2 2020 as companies scrambled to preserve cash to see them through the economic stoppages sweeping the world. In each successive quarter, however, the reductions became smaller as companies reassessed the situation and those least affected began to restore suspended payouts.
Over the whole twelve months, two thirds of companies reduced or pulled their dividends, and every sector saw firms cut payouts. But the impact was extraordinarily varied. For example, all the banks and nine tenths of companies in sectors dependent on discretionary consumer spending (like travel or non-food retail) reduced payouts, but less than half in essential sectors like food production, basic household items, food retail and telecoms did so.
In total, COVID-19 cost investors £44.8bn in lost dividends over the twelve months. The banks were banned from paying dividends by the PRA and made up three tenths of the decline, oil companies another quarter.
The overall impact in the top 100 was much less severe than in the mid-250 and among smaller companies, primarily because bigger multi-nationals are more financially resilient and because the dividend giants in defensive sectors (like Unilever, AstraZeneca or British American Tobacco) are represented in the top 100. Top 100 payouts fell 39.1% (cuts of £36.4bn) compared to a decline of 60.3% in the mid-250 (£6.7bn). Just over half (54%) of the top 100 cut dividends, almost two thirds (65%) of mid-250 companies followed suit, but over three quarters (76%) of the UK’s smaller firms were forced to make reductions.
By value, food retailers were the stand-out winners, increasing their dividends by 22% on an underlying basis, thanks, in particular, to Tesco. The big supermarkets were quick to return government aid thereby gaining the flexibility to reward shareholders. Consumer basics (including names like Unilever and Reckitt Benckiser) and general financials were the only other two sectors to see dividends grow between April 2020 and March 2021.
Despite the worst recession in modern history, just over a quarter of companies (27%) were able to increase their dividends; 6% held them steady.
During the pandemic, many companies that had been over-distributing permanently reset their dividends to more sustainable levels. Most of these now hope to grow their dividends gradually from this lower base. For others, the effect of the cuts is more transitory so they will bounce back quickly, however, 2025 still looks like a realistic moment for UK dividends to finally match their 2019 underlying high point.