Equity income - is the old model broken?
Reassessing the sector during Covid-19
The lockdowns put in place to slow the spread of coronavirus have brought about an unprecedented demand shock for companies in the most affected industries.
In a high-profile example - from a sector so hard-hit as to be something of a special case - Royal Dutch Shell cut its dividend for the first time since 1940 on 30 April "to provide financial resilience and further flexibility to manage the uncertainty", in the words of the board.
While cutting, suspending or delaying dividends may be the best option for a company, it can be frustrating for investors who had looked forward to receiving the cash, and especially painful for those relying on dividends for their income.
Four reasons why your stocks have cut dividends
Shell is, of course, subject to the particular dynamics of the oil market. More broadly, we identify four main reasons why companies are cutting or cancelling their dividends.
The first is cashflow destruction as the sudden halt in much economic activity leads to a cash crunch. In addition to energy companies, retailers M&S and H&M, hotel chain Marriott, car maker Ford, and housebuilders Persimmon and Taylor Wimpey have cut dividends after deciding they simply cannot spare the cash.
The companies most affected in this way are those with the weakest balance sheets or in particularly cyclical industries.
A second reason is that despite having the ability to pay, significant uncertainty persuades management to hold onto cash. Companies in this position include Sainsbury's and ITV.
For companies cutting dividends essentially out of prudence, revenues may not have been so dramatically impacted as for the first group, but balance sheets could be under a little strain.
Thirdly, some financial regulators have told banks and insurers not to pay dividends. The Bank of England has requested major UK banks to cancel dividends for 2020 and those still to be paid from fiscal year 2019, affecting HSBC, Standard Chartered, Lloyds, Barclays and RBS.
The European Central Bank has asked banks such as UniCredit, ABN-AMRO and ING not to pay dividends until at least October.
Since the Financials sector pays the most dividends, with 27% of the global total, the effect is substantial.
The fourth main reason for dividend cuts is political. In France, for example, the government has put pressure on partly state-owned companies to cut dividends by 30% and has asked other French companies to show 'solidarity' by doing the same.
Aerospace and defence company Thales, as well as telecoms giant Orange, have duly complied.
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