Dividends paid and restored outpace cuts in January

“The FTSE 100’s first-week gains are ebbing away, but the index is broadly unchanged on where it began 2021 and one reason why may be some encouraging news on dividends,” says Russ Mould, AJ Bell investment director. “Payment declarations came to £1.1 billion, while a further £91 million worth of dividends were restored, against just £27 million of cuts. A further five firms – Crest Nicholson, TT Electronics, Accrol, Headlam and Mission Group – also declared their intention to restore dividends shortly, to further boost the income received by investors in the UK stock market.

Source: Company accounts

“While there is no denying that the economic backdrop is a very difficult one – and that hopes for a rapid bounce back in activity are fading a little – firms’ ability and willingness to make dividend payments suggests that they have planned for a worst case scenario and managed their costs and husbanded their resources and cash accordingly. 

“Despite the second and third lockdowns that worst case may not be materialising, especially as Government support schemes continue to operate – unemployment may now be nearing five-year highs at 5% but that is still a historically low figure for the UK, and it is a long way below the peaks of 11.9%, 10.7% and 8.5% in the 1980s, 1990s and 2000s respectively.

“A key test could be if the lockdown is extended or only lifted very slowly, the global economy double-dips or Government support via the furlough scheme, cheap loans and tax breaks come to an end.

“That remains perhaps the bear case on UK dividends, while the bull case is that payments and restorations continue to pick up, as shown by January’s data.

“February will represent a stiffer test, as the big oil firms, BP and Shell, will release their latest results, as will the big five banks and those seven names will go a long way to setting the tone. Investors are hoping that the banks start to restore payments, while the oils will again show year-on-year decreases, although even here income seekers could be forgiven for thinking that the worst may be over. Shell cut its dividend in April last year and BP in August, so we will lap these shortly and the base effect will start to kick in.

“The banks will be particularly important as the lenders and insurers between them are currently expected by analysts to provide just over half of the total dividend growth forecast for the FTSE 100 in 2021, or a £5.6 billion increase out of a total £10.9 billion hike.

Source: Company accounts, Marketscreener, Sharecast, consensus analysts’ forecasts

“That helps to support an overall estimated yield from the FTSE 100 of 3.6% for 2021, a figure which beats cash in the bank, Government bonds and National Savings & Insurance hands down, albeit in exchange for greater capital risk (since share prices can go down as well as up). Any hints from the Bank of England about negative interest rates could bring that figure into greater focus and the prospective yield may already be providing some support to UK equities.

“FTSE 100 looks set to make limited progress at best in January but you could argue it is also showing considerable resilience in the face of everything from the virus to vaccine rows and from attacks on Capitol Hill to wobbly economic data.”