No matter how you do the maths, a big UK dividend cut is coming
While calculating dividends can be a surprisingly contentious issue, one thing that is not up for debate is that 2020 will see a very large cut in the UK market dividend
The market falls that followed the global spread of the Covid-19 pandemic have thrown up some particular challenges for income-focused investors. That is why, here on The Value Perspective, we have set out to offer some regular commentary on UK dividends, in pieces such as What’s next for UK dividends? and An inevitable side-effect of Covid-19.
Calculating dividends themselves can be a surprisingly contentious issue. Should you factor in special payments? No? Well, what about those ‘specials’ that are paid at the same level year after year? And what period do you use for your calculations? The ex-dividend date or pay date? And what exchange rate do you use to translate, say, dollar or euro dividends? That alone can be a significant consideration for UK investors.
In short, then, there are many, many ways to calculate dividends – and people can spend a lot more time than they should debating the subject. Still, as we also touched on in An inevitable side-effect of Covid-19, one thing that is not contentious is that – no matter how you do the maths – 2020 is going to see a very large cut in the UK market dividend.
Don’t ‘push the envelope’
What is more, this cut will be impossible for professional investors to offset without ‘pushing the envelope’ and skewing portfolios in an unacceptable way. Indeed, the Investment Association has explicitly recognised this by relaxing the constraints on UK equity income funds to ensure investors are not negatively impacted by a desperate – and likely futile – attempt to chase yield in the few areas that have maintained their dividends.
Forecasts as to exactly how this is going to play out within the UK market are hard – as forecasts tend to be – but there is no doubt companies themselves are struggling to decide on an appropriate plan of action. Many UK businesses have a December year-end, which means the end of June will have seen them finish their half-year and they will now be trying to work out what to do with their interim dividends.
There has been little in the way of clarity on the economic impact of Covid-19 and businesses are desperate not to look foolish by paying a dividend only to discover they need the cash they have just paid out. That said, they currently have the cash and they want to pay a dividend, which goes some way to explaining the wide variations in 2020 estimates of a cut to market dividends of anything between 30% and 50%.
Working towards greater clarity
As we work our way through companies’ half-year reports, here on The Value Perspective, we should obtain much greater clarity on how this year will pan out. As things stand, our own instinct is that the market should expect a decline towards the top end of that range as businesses err on the side of caution – and not looking stupid – particularly once they factor potential regional spikes and second lockdowns into their thinking.
While we are working hard to offset the inevitable decline in dividends for our own income-focused clients, outperforming that decline will be extremely difficult – especially given the concentration of value within markets and our unwillingness to sacrifice that value exposure. More positively, the level of yield currently available from the UK market remains reasonably attractive – particularly versus other asset classes and geographies – and, as companies rapidly return to the dividend register, growth from the new base should be significant.
Fund Manager, Equity Value
I joined Schroders in 2000 as an equity analyst with a focus on construction and building materials. In 2006, Nick Kirrage and I took over management of a fund that seeks to identify and exploit deeply out of favour investment opportunities. In 2010, Nick and I also took over management of the team's flagship UK value fund seeking to offer income and capital growth.
The views and opinions displayed are those of Nick Kirrage, Andrew Lyddon, Kevin Murphy, Andrew Williams, Andrew Evans, Simon Adler, Juan Torres Rodriguez, Liam Nunn, Vera German and Roberta Barr, members of the Schroder Global Value Equity Team (the Value Perspective Team), and other independent commentators where stated.
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