Dividend drought: are there any silver linings for income seekers?

by Jemma Jackson from interactive investor |

We now see more sense and less panic around dividend cuts. interactive investor’s experts explain why and spot silver linings for income seekers.

An old stock market adage is ‘never sell Shell (LSE:RDSB)'. But after reducing its divided for the first time since the Second World War, it is another hammer blow for investors. But are there any silver linings for income seekers?

Richard Hunter, Head of Markets, interactive investor, comments on Shell specifically, while Rebecca O’Keeffe, Head of Investment, interactive investor, comments on income more generally. Interactive investor is also publishing a regular dividend tracker (see below).

Rebecca says: “Many companies are suspending their dividends for the right reasons.

A cut in dividends has historically been perceived by the market as a problem, and indeed companies early on in this crisis were punished (sometimes severely) for being up-front and pro-active, but sentiment has shifted somewhat over the past few weeks and we are now seeing more sense and less panic.

However, where companies have reduced or suspended their dividends, it will leave investors having to weigh up whether this represents a prudent measure designed to tide a good, solid business over a brief period of volatility and uncertainty, or whether it is a reflection of a new post-Covid-19 world and the impact that will have. 

“’Income’ can sometimes be a misnomer. It is the total return which an investor ultimately receives, and this is fundamentally what matters, so a temporary suspension or trimming of dividends may reduce ‘income’ in the short term, but it is not necessarily going to harm the long term returns from a share if it is the right thing for that company to do. 

“The key to managing your investments in extreme markets is to try and make sure that you don’t rush into reactive decisions, which often prove to be the wrong thing to do, at the wrong time and for the wrong reasons. 

“It is essential for investors to take a hands-on approach and make sure that you are happy that your portfolio has the balance you want and the risk level you are happy with. However, it does mean being measured in your approach and this is particularly relevant in respect of companies cutting dividends. Take a long-term view and make sure that where you are making changes, you are doing it for the right reasons.”

Richard commented: “The reduction of the dividend will inevitably grab the headlines, but Shell’s brave decision reflects a desire to hunker down and protect the business in the wake of a worsening global economic outlook and a highly unstable oil price.

Of course, the reduced dividend to 16c per share from a previous level of 47c, itself unchanged since 2014, will be a blow to income-seeking investors and existing shareholders, but can be seen as a positive on two levels.

“Firstly, the move is financially prudent (and understandable, given a 28% fall in revenues and a 46% drop in replacement profit), while at the same time the dividend is now at a level which the company believes to be sustainable in the future. Secondly, even at the lower revised figure, the implied dividend yield of around 3.5% (compared to the current 10%) is still likely to exceed the FTSE 100 average due to dividend cuts elsewhere. 

“In addition, the rebasing of the dividend should free up some $9 billion over the next year. At the same time Shell is looking to reduce operational and capital expenditure by a similar amount, while expected divestments will add further grist to the financial mill, all of which will create a war chest running to nearly $30 billion.

“This capital cushion is vital in the current environment, where oil in particular is in a parlous state. A toxic combination of demand destruction, with aircraft standing idle, vastly reduced travel generally and manufacturing shutdowns, alongside the issue of oversupply, to the extent that even storage of physical oil is becoming more difficult as storage space is increasingly taken, have put the oil majors on red alert.

“More positively, Shell’s record over the last few turbulent years – including a profit warning at the end of 2019 - has been one of financial housekeeping on a truly industrial scale. Its current gearing level of 29% is above its long-term target of 25%, but nonetheless compares favourably with BP, where the figure is 36%. Furthermore, this ability to streamline operations with agility and speed strengthens what is already a strong investment proposition.

“The disappointment of the dividend decision has clearly manifested itself in the share price reaction, which adds to a 46% decline over the last year, as compared to a dip of 18% for the wider FTSE 100. In relatively dark days such as these, investors will take some comfort from the fact that, even in this environment, Shell is still profitable and is paying a dividend. Some of the sheen may have been lost from the company’s relatively bombproof reputation as a core portfolio constituent, but the market consensus of the shares as a buy for the longer term should remain unaffected.”

Interactive investor Dividend Tracker

Company Future dividends suspended or Previous dividend cancelled Date of dividend decision
     
Royal Dutch Shell Future 30/04/2020
Sainsbury's Future 30/04/2020
Compass Future 23/04/2020
AB Foods Future 21/04/2020
Informa Future 16/04/2020
Ferguson Previous 15/04/2020
Mondi Future 09/04/2020
Direct Line Previous 08/04/2020
DS Smith Previous 08/04/2020
RSA Previous 08/04/2020
Aviva Future 08/04/2020
Imprint Previous 07/04/2020
Inchcape Previous 07/04/2020
Cineworld Both 07/04/2020
Rolls Royce   06/04/2020
GVC Previous 06/04/2020
Petrofac Previous 06/04/2020
Br Aerospace Defer 03/04/2020
IAG Future 02/04/2020
Wood Group Previous 02/04/2020
Close Bros Previous 02/04/2020
Hays Previous 02/04/2020
Bunzl Future 02/04/2020
Centrica Future 02/04/2020
Land Securities Both 02/04/2020
Standard Chartered Both 01/042020
Royal Bank Scotland Both 01/042020
HSBC Both 01/042020
Lloyds Banking Group Both 01/042020
Barclays Both 01/042020
QinetiQ Group Future 01/04/2020
Savills Previous 01/042020
Carnival Future 31/03/2020
Smiths Group Future 31/03/2020
AA Future 31/03/2020
James Fisher Previous 31/03/2020
St Modwen Props Previous 31/03/2020
WPP future 31/03/2020
Essentra Previous 27/03/2020
Prov Financial Previous 27/03/2020
Marshalls Previous 27/03/2020
Hill & Smith Previous 27/03/2020
Domino's Pizza Previous 27/03/2020
Flutter Deal 27/03/2020
Meggit Previous 27/03/2020
Rightmove Previous 27/03/2020
Weir Group Previous 26/03/2020
British Land Future 26/03/2020
Barratt Devs Previous 25/03/2020
Mears Future 25/03/2020
Halfords Future 25/03/2020
Bellway Future 25/03/2020
Persimmon both 25/03/2020
Rentokil Both 25/03/2020
Dunelm Previous 24/03/2020
Redrow Previous 24/03/2020
Taylor Wimpey Previous 24/03/2020
RPS Previous 24/03/2020
Whitbread Future 24/03/2020
Aggreko Previous 23/03/2020
ITV Both 23/03/2020
Stagecoach Future 23/03/2020
Go-Ahead Previous 23/03/2020
Airbus Previous 23/03/2020
Kingfisher Future 23/03/2020
N Brown both 23/03/2020
Card Factory Future 23/03/2020
Greggs Previous 23/03/2020
Lookers Future 23/03/2020
Filta Group Future 23/03/2020
IWG Previous 23/03/2020
M&S Future 20/03/2020
IC Hotels   20/03/2020
Johnson Service Group Previous 20/03/2020
Wetherspoons Future 20/03/2020
Travis Perkins Future 20/03/2020
Ford Future 19/03/2020
Elemebtis Both 19/03/2020
Crest Nicholson Previous 19/03/2020
Playtec Previous 19/03/2020
National Express Previous 19/03/2020
Heavitree Brewery Previous 19/03/2020
Quartix Holdings Previous 19/03/2020
Joules Future 19/03/2020
Croma Security Services Previous 19/03/2020
Portmeirion Group Future 19/03/2020
Marstons Future 18/03/2020
Shoe Zone Previous 17/03/2020

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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