Oil majors are no longer income stalwarts for fund managers

Data shows that UK equity income funds have been cutting exposure to income stalwarts.

A bleak year for income seekers was at least not made any worse, as oil major BP (LSE:BP.) today (27 October) resisted any temptation to make further changes to its dividend payments.

In August, BP halved its dividend from 10.5 cents a share to 5.25 cents. This marked its first cut in 10 years, with the sustained fall in the oil price and reduced demand for fuel arising from the pandemic taking its toll. 

There was some speculation that BP would cut the dividend further when announcing its third-quarter results for 2020, but this did not materialise. In fact, BP unexpectedly swung back into profit and announced an unchanged dividend of 5.25 cents. As Richard Hunter, head of markets at interactive investor, points out: “Even at these lower levels, an implied yield which comfortably exceeds 7% is a refreshing boost for income-starved investors, even if some of this relatively lofty figure results from the share price decline.”

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An unchanged dividend for BP is good news for fund investors who own UK equity income funds, but the oil major is no longer the income stalwart it once was.

Numbers from data provider FE Analytics shows that a year ago (end of September 2019), BP was a top 10 holding for almost half (47.5%) of UK equity income funds. Fast-forward 12 months and the percentage figure has dropped notably – just over one in five funds (21.2%) have BP as a top 10 position.

BP dropping out of the top 10 of a number of UK equity income funds will be down to one, or a mix, of the following: fund managers have either completely sold/trimmed their positions, or BP’s heavy share price fall over the past year has reduced the weighting in the fund so significantly that it has fallen out of the top 10 holdings.

The data indicates that there has been a shortage of fund managers buying BP to take advantage of its share price falls. Over the past year, BP’s share price has declined by 61% versus a drop of 21% for the wider FTSE 100 index.

The same pattern has played out for the UK’s other oil major, Royal Dutch Shell (LSE:RDSB). A year ago, 15.2% of UK equity income funds had the share in their top 10 holdings, but this has now declined to 6.1%. Earlier this year, the firm cut its dividend by two-thirds for the first time since the Second World War. Its share price over the past year is down 60%.

The concentration of dividend payments among UK listed companies has long been a potential source of risk. Dan Hanbury, manager of the ES River and Mercantile UK Equity Income fund, points out “some 60% of the lost dividend income within the UK equity market this year has been concentrated in the structurally challenged oil and banking sectors, with much of the balance in consumer discretionary stocks”.

Given that this is the case it is good to see that fund managers have been reducing exposure to stocks that have a huge influence on the overall dividend payments for the UK market.

The top three income stocks in the top 10 of UK equity income funds are: GlaxoSmithKline (LSE:GSK) (58%), Rio Tinto (LSE:RIO) (37%) and British American Tobacco (LSE:BATS)(34%).  

Hanbury adds that 2020 has been one of the worst years on record for income investing but he believes “there are signs that we are at, or close to, a low point now.

“While some sectors have been impacted severely and will take time to recover, there are plenty of exceptional opportunities elsewhere in the UK market to hunt for attractive dividend yields, as well as to protect and grow capital,” says Hanbury.

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.