The biggest impact was felt immediately in Q2 2020, as companies scrambled to preserve cash to see them through the economic stoppages sweeping the world. In each successive quarter, however, the reductions became smaller as companies reassessed the situation and those least affected began to restore suspended payouts.
Over the whole 12 months, two-thirds of companies reduced or pulled their dividends, and every sector saw firms cut. But the impact was extraordinarily varied. For example, all the banks and nine-tenths of companies in sectors dependent on discretionary consumer spending (such as travel or non-food retail) reduced payouts, but less than half in essential sectors like food production, basic household items, food retail and telecoms did so.
The winners and losers
In total, Covid-19 cost investors £44.8bn in lost dividends over the 12 months. The banks, banned from paying dividends by the Prudential Regulation Authority, made up three-tenths of the decline, oil companies another quarter. Miners accounted for £1 in every £14 of the cuts. Leisure and travel, housebuilding and consumer goods, and industrial goods and support each suffered cuts worth more than £2bn too, equivalent in each case to approximately £1 in £22 of the total reduction.
The overall impact in the top 100 companies was much less severe than in the mid-250 and among smaller companies. This is because bigger multinationals are more financially resilient and because the dividend giants in defensive sectors (like Unilever, AstraZeneca or British American Tobacco) are represented in the top 100.
Top 100 payouts fell 39.1% (thanks to cuts of £36.4bn) compared to a decline of 60.3% in the mid-250 (cuts totalled £6.7bn).
By value, food retailers were the stand-out winners, increasing their dividends by 22.0% on an underlying basis, thanks, in particular, to Tesco.
The big supermarkets returned government aid thereby gaining the flexibility to reward shareholders after months in which consumers, barred from hospitality and the office lunch routine, bought almost all their food from supermarkets.
Consumer basics (including names such as Unilever and Reckitt Benckiser) and general financials were the only other two sectors to see dividends grow between April 2020 and March 2021.
The London Stock Exchange Group, which profited from huge trading volumes throughout the crisis, was among those able to pay out more.
Despite the worst recession in modern history, just over a quarter of companies (27%) were able to increase their dividends; 6% held them steady.
2021 and beyond
During the pandemic, many companies that had been over-distributing permanently reset their dividends to more sustainable levels. Most of these now hope to grow their dividends gradually from this lower base. For others, the effect of the cuts is more transitory so they will bounce back quickly.
We now expect underlying dividends to rise 5.6% to £66.4bn (down from an expected increase of 8.1% in January) in our best-case scenario.
We are slightly less optimistic because restrictions on bank payouts will remain very tight. It’s worth remembering that 2021 is held back by Q1 still suffering the effect of Covid-19’s dividend cuts.
Payouts in Q2 and Q3 should be significantly higher than in 2020.
For the full year, headline dividends will shoot up 17.2% to £74.9bn, thanks largely to the enormous Tesco one-off payment in Q1. Whereas Tesco’s special dividend was to distribute asset-sale proceeds, the big miners are using them to pass on bumper profits. BHP’s Q1 payment was just the first. Rio Tinto is set to pay close to £800m in the second quarter too.
Looking to the future, 2025 looks like a realistic moment for UK dividends to finally match their 2019 underlying high point. If the recovery is stronger than we anticipate, retail investors will reap the rewards of holding their nerve throughout the tumultuous last 18 months.
Ian Stokes is MD of Corporate Markets, Link Group