Dividend resumption fails to boost Sainsbury's share price

“The restoration of dividend payments at Sainsbury is not boosting the share price, presumably because investors are of the view that chief executive Simon Roberts’ efforts to explain away up to £1 billion of restructuring costs over the next three years as ‘one-off’ items are as futile as the Bank of England’s attempt to boost the economy with an extra £150 billion of Quantitative Easing,” says Russ Mould, AJ Bell Investment Director. 

“Nevertheless, Sainsbury is speaking loudly and clearly to one class of portfolio builder, namely the income-seeker, as it is now the fifteenth FTSE 100 firm, and the sixty-fifth in all, to either resume or announce a plan to resume dividend payments.

 
Source: Company accounts. *Includes special payment of 7.2p per share.

“This offers investors a glimmer of hope that the worst may be over when it comes to the depressing number of dividends that were suspended, deferred, cut or even cancelled altogether in the spring. Companies have planned for the worst and marshalled their resources accordingly, using Government support in terms of the furlough schemes, VAT or rate relief or loans as and when required, and in some instances the worst case has yet to transpire, despite further lockdowns during the autumn across the UK.

“This is not to say that income seekers can start a victory lap and argue that their style of investment is well-and truly back on track or in fashion. The total value of dividends restored is currently some £3.4 billion, miles below the £46.7 billion of cuts, cancellations, suspensions and deferrals that investors have suffered through the course of this year.

“But in July, August and September, the total value of dividends paid and restored outstripped the sum of those that were cut or cancelled, although HSBC, Shell and BP’s reductions or cancellations for their fiscal third quarters meant that bad news exceeded good once more in October.

Source: Company accounts

“Ten of the 65 dividend restorers have yet to declare how much they will pay, including FTSE 100 firms Land Securities, DS Smith, British Land, BT and Rentokil.

Source: Company accounts

“The more firms that return to the dividend list, the greater comfort investors may also be able to draw from aggregate consensus analysts’ forecasts that the FTSE 100 offers a dividend yield of 4.1% for 2021, up from around 3.4% in 2020.

 
Source: Company accounts, Sharecast, consensus analysts’ forecasts

“This may seem far-fetched right now, especially as the pandemic continues to make its presence felt in the West in the particular, but the English and UK economies are not a huge contributor to the FTSE 100’s aggregate earnings or cash flows. Moreover, the banks are clearly champing at the bit when it comes to paying dividends, although the Bank of England’s latest efforts to manipulate the bond market via QE could yet have the entirely unintended consequence of further squeezing the margins on banks’ loan books, making it harder for them to earn the sort of profits that facilitate substantial distributions to shareholders.

“And if the banks do fail to make it back to the dividend list in 2021 for whatever reason, be it regulation pressure, a double-dip recession or the margin-crushing impact of zero- and negative-interest-rate policies, then the FTSE 100’s forecast 4.1% dividend yield could prove to be a pipe-dream. This is because banks (along with insurers) are currently forecast by analysts to be the single biggest contributor to FTSE 100 dividend growth in 2020.

Source: Company accounts, Sharecast, consensus analysts’ forecasts