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What now for dividends

The Prudential Regulation Authority has advised banks not to pay dividends and asked insurers to consider withholding them to shore up liquidity during the coronavirus pandemic. Recipients of funding through the Coronavirus Large Business Interruption Loan Scheme and the Covid Corporate Financing Facility will also face restrictions. Former BBC Business journalist Pippa Stephens considers how the market will handle this and what the path back to dividend payments for investors looks like.

Wash your hands for 20 seconds; stay two meters away from other people in public; befriend your couch. Making decisions on a personal level about how to manage the coronavirus is, for the most part, straightforward. 

But as the virus permeates deeper into Britain’s economy - and the world’s - handling it at corporate level is anything but. 

At such a critical time, the nature of corporate responsibility is under the spotlight. 

Tesco was widely criticised for receiving government support while paying its dividend; as were companies in Germany, such as Volkswagen. Doing so wouldn’t fly in the US, where businesses are not allowed to. 

Even Premier League football clubs have felt the heat. Tottenham Hotspur and Liverpool were forced to overturn a decision to furlough some non-playing staff at the taxpayer’s expense. 

For some industries, regulatory advice makes things a little clearer - at least in principle. 

In the UK’s financial sector, banks have been told to pause on their dividends. 

British insurers have been given softer advice. But many of the financial sector’s biggest companies, such as Barclays, Santander, Aviva and Direct Line, have paused on their dividends. 

But the situation is not cut and dry. Legal and General and Hastings in the UK, and Germany’s Allianz, have continued paying their dividends, despite discomfort from British and European regulators 

At the start of April, 45 per cent of British companies had stopped their dividends, leaving investors £25bn short, with up to £24bn more at risk, according to Links Group financial data company. 

Fears about what this means for the wider economy - particularly for charities, and pension funds - are growing. 

Direct Line acts on ‘challenging times’ 

For Direct Line, the decision was a difficult one, a spokesperson at the company told the ICAEW. 

The insurer made the move, along with pausing share buybacks, as it wanted to “remain as a sustainable business for all our stakeholders,” the spokesperson said. 

Long-term sustainability was “paramount”, they said, so the company could protect its policyholders and support its wider stakeholders. 

Money saved from its dividend of 7.2p per share will remain “on the balance sheet”, although Direct Line’s investors - some of which will be pension funds - will have less income, they added. 

“We understand that these are challenging times for everyone in the country and we will continue to make the decisions needed to protect the long-term interests of the group for the good of our customers, our people and our investors,” Direct Line’s spokesperson said. 

‘We’ll pass on benefits’ - Hastings 

Insurance companies may decide against following the regulators’ advice for a number of reasons. 

Hastings’ chief financial officer John Worth told the ICAEW its strong capital position and available liquidity allowed it to retain its dividend of 5.5p a share, along with the fact its product lines have “no exposure” to damage from COVID-19. 

Hastings could pass on benefits, he said, such as reductions in premiums to those in need. 

Mr Worth said protecting Hastings’ policyholders during these uncertain times was at the “forefront of our minds” when making the decision. 

He added: “We however know that many investors rely on dividends to support their underlying fund performance on which many stakeholders rely, including pension funds and charities. 

“Therefore, to the extent corporations can afford to maintain their dividends, then this will support those investment funds and therefore the wider economy.” 

All of Hastings’ staff were being paid their full salary, he said, and the company was not intending to take advantage of any government support. 

Ford: $2.4bn saved for its future 

Hastings and Direct Line show how two companies in the same country and the same sector can deal with the pandemic in different ways. 

In the US, banks are continuing to pay dividends, unlike in the UK. 

This isn’t the case with the car manufacturing industry, which has been among the hardest hit by COVID-19, due to a fall in demand for new cars and factory shutdowns. 

Many carmakers have suspended dividends, including Ford, one of America’s biggest. The move, with its dividend of 15 cents [12p] a share will save it some $2.4bn over the course of this year. 

A Ford spokesperson told the ICAEW the decision was part of its “decisive action” to “maximise cash and financial flexibility, to both weather coronavirus-related economic uncertainty and continue to invest in our future”. 

They added: “The additional cash from the suspended dividend and other actions will support sustaining and strategic initiatives across the entire Ford enterprise.” 

The savings will be put towards new products and company growth, and the losses from factory shutdowns. 

Announcing the dividend cut, the company said it wanted to be able to “separate itself from competitors” and to be an “engine for the recovery of the economy” when the pandemic was over. 

How will savers be hit? 

In the weeks to come, many more companies are expected to follow in Ford’s footsteps. 

Many people are questioning what the absence of such dizzying sums - some £50bn in the UK - means for the economy at large. 

Philippa Kelly, technical strategy business group director at the ICAEW, said: “Without dividends, and or with a reduced dividend stream expected in future asset prices will take longer to recover.” 

She said the pension landscape in the UK meant savers needed dividends “more than ever”, as the move away from compulsory annuities meant they were holding equity risk in their portfolios for longer and had equities as alternative savings to cash. 

“Younger savers who are unlikely to see the asset growth experienced by previous generations will also be looking to dividends to help grow their pensions and ISAs,” Ms Kelly added. 

That generation would “already be badly affected by the economic fallout from the pandemic”, she said, so needs a plan to bring dividends back. 

‘Meaningful loss’ for charities 

Pension funds are not the only ones set to lose money during this time. Dividends are also a big source of income for charities. 

Rupert Rucker is head of income solutions at the investment bank Schroders, which has a number of charity clients. 

He said the withdrawal of dividend income was a problem as charities need income every “week, month, week and year” to do their work. 

Mr Rucker said his concern was charities were assuming they would get the same income they did in the past, as the yields look the same - but in reality were not. 

Charities would see a “meaningful loss” of income for the short term and may need more contributions to fill the gap, he said. 

“There are a lot of initiatives under way around the country to try and help charities, but eventually some might fall through the gaps,” added Mr Rucker. 

‘Triple whammy’ for finance sector 

Alongside charities and pension funds, many in the financial sector will be wondering what a path back to normality will look like. 

According to Mick McAteer, co-director at the Financial Inclusion Centre, it will involve households and financial institutions living with low interest rates and yields for “much longer than expected.” 

It will be “very treacherous” for many financial institutions, he said, as no one knows what recovery will look like. 

“We could see many financial firms failing. We can't predict how many,” he said. 

Mr McAteer said the financial pain will hit when the support measures are removed and businesses and households have to survive, financially, until sustained economic recovery, 

He said three factors would be a “triple whammy” for weaker firms: 

  • Household finances under pressure, impacting loan payments or insurance premiums, affecting firms' revenues;
  • COVID-19‘s impact on asset prices which will hit balance sheets, and 
  • The cost of redress or legal claims. 

One facet of the coronavirus has been that people are beginning to take stock of their lives, and their routines. 

Working from home could become the norm for white-collar jobs, or maybe baking bread will win over cocktails on a Friday night. 

This may be reflected in corporate culture, too. 

A move away from reliance on dividends and share buybacks would be no bad thing, said Mr McAteer, as it will “improve productivity and promote more sustainable economic growth”, and be “good in the long term for shareholders in financial institutions, too”. 

The sense of what a company owes investors is balance, and could be changed by the coronavirus pandemic. It may mean something positive comes out of it. 

Regardless of how the corporate landscape turns out, businesses must now make some tough decisions. 

Perhaps by keeping in mind the long-term picture; the future that Ford is saving for, or that Hastings is hoping to support, the responsibility will be a little easier to bear.

About the author

Pippa Stephens is a freelance journalist in Berlin with over a decade of experience at FT business magazine Pensions Week, BBC News, BBC Business and the World Service.