AXA IM: UK dividends set for 'fuller recovery' by 2022
'Good news' for utilities and consumer staples
Next year will be a "better year for dividends" for those invested in UK equities while a "fuller recovery" is on the cards for 2022, according to AXA Investment Management's George Luckraft and Simon Young, who added that firms less affected by the Covid-19 pandemic will likely pay some of their deferred dividends later this year.
The managers, who head up AXA's Framlington Monthly Income and UK Equity Income funds, said it is "understandable" that firms have reduced or cancelled their dividends, given the assistance the Treasury and the Bank of England have provided this year.
However, most sectors have already started to see a rebound in demand, while "pockets of strength" among UK dividend-payers such as utilities are likely to offset any widespread cuts in dividends, according to the pair.
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"As we go through the year, I expect companies which weren't as affected by conditions during the crisis may pay some of their deferred dividends," Luckraft said.
"This is a trend we are starting to see with Rotork, St. James's Place and Sabre Insurance to name a few, announcing in their latest quarterly reports that they would pay previously deferred dividends.
"Therefore, I think there will be a pick-up in news later in 2020."
That said, the manager "would not be surprised" if UK dividends were to fall by 40%-50% over the course of 2020, given blue-chip giants such as Shell have cut their dividend by two thirds, while BP halved its payout.
"Companies who might be facing difficulties are taking a pragmatic approach with their dividend to ensure their balance sheets are strong and that they are concentrating on liquidity," Luckraft explained. "We expect that 2021 will be a better year for dividends and it is our view that we will see a fuller recovery in 2022."
Young added that, because assistance has "rightly" been provided to businesses through policies such as the furlough scheme, bounce-back loans or business interruption loans, recipients have "understandably deferred of cancelled their dividends" in order to avoid a "much more dire economic situation".
"As well as this, there has been regulatory pressure to cut dividends. The banking regulator, the Prudential Regulation Authority (PRA), wrote to the major UK banks requesting they cancel dividend distributions at the end of March," the manager pointed out.
While most sectors have seen a rebound in demand, Young said the coronavirus crisis will "exacerbate and accelerate" structural changes that were already underway, with online shopping, low interest rates and working from home all likely to impact the retail, commercial property and financial services sectors for "a number of years to come".
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"It is hard to see dividends rebounding fast across the board in these sectors given these pressures," he warned.
"The good news for dividends comes in sectors where demand has remained robust such as utilities and the majority of the consumer staples companies. While mining companies have benefitted from rising commodity prices, motor insurers have experienced fewer accidents as less people have commuted to work.
"These pockets of strength will not have the power to offset the widespread cuts in dividends, but will help cushion the blow, especially for funds with exposure to them."
AXA Framlington Monthly Income, which has been headed up by Luckraft since 2002, has comfortably outperformed its average peer in the IA UK Equity Income sector over one, three, five and ten years, according to data from FE fundinfo.
Over the past half decade, it has more than doubled the total return of its sector average with gains of 11.3%.
AXA Framlington UK Equity Income, which Young took to the helm of in 2018, succeeding Jamie Forbes-Wilson, has achieved top-quartile total returns relative to both its average peer and its FTSE 350 benchmark over one, three, five and ten years, as well as over the last six months.
The funds have dividend yields of 5.66% and 4.31% respectively.
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