Is there a way back for dividends?

26 May 2020: The government has told banks and asked insurers to pause shareholder dividends to help firms keep money and fight the effects of coronavirus. But there are unintended consequences, writes Pippa Stephens.

Thanks to the global economic turmoil caused by COVID-19, the nature of corporate responsibility is under scrutiny unlike before.

This is clear by looking at Premier League football clubs, flip-flopping over expensive staff furloughs, and is also apparent in the corporate world, with attitudes to dividend payments. 

Paused dividends

Regulators in the financial sector directed banks to pause dividends, but took a softer line with insurers, asking only that they take suspension as guidance. Barclays, Santander, Aviva and Direct Line all have, to name a few.

Some companies, like the insurer Direct Line, have chosen to withhold theirs to keep afloat - a decision they found “difficult”. Others, like Hastings, vowed to keep paying, to support the wider economy. 

Along with insurers, the motor industry has been hit hard by the pandemic. America’s Ford said it would save $2.4bn this year through suspending its dividend, which it plans to put towards new products and help with money lost through factory closures. 

What is the effect?

Back in the UK, up to £50bn in dividends is at risk and many are concerned about what this absence will mean. Pension savers are likely to feel the loss, with increased exposure to equities following a move away from compulsory annuities. 

And charities, which rely on income from dividends each week, month, and year, will need to up their contributions to cover them. Some will fall through the net. an expert told us. 

It may be that coming out of this, investors begin to look to more long-term, sustainable sources of income, which would be good news for the financial services industry. 

You can read more about this in the longer feature on the Financial Services Faculty’s site here.