With the recession biting, dividend payouts for 2009 are plunging.
No one can have failed to notice that a number of Britain's leading companies have been slashing their dividends this year, with the banks making the biggest headlines. Other struggling behemoths, like British Airways (LSE: BAY), and BT Group (LSE: BT-A), have also figured amongst the leading names. But the full extent of the fall might surprise a few.
Falling yields
According to recent research by Capita Registrars, total dividend payouts from UK companies in the first half of this year were down 9% compared to the same period in 2008. And worse, total full year dividends are expected to be cut by 13%, resulting in a total of £52bn being returned to shareholders.
In comparison to that, companies have been more concerned with raising capital to prop up their balance sheets through the recession than with paying cash out, and during the first six months alone, a whopping £51bn in new capital has been raised. A large proportion of that is down to the banks, which together raised £27bn.
With Lloyds Banking Group (LSE: LLOY) and Royal Bank of Scotland (LSE: RBS) having suspended dividends altogether, it seems surprisingly that the banking sector as a whole has only cut dividends by around 29%.
Some support
In fact, if it wasn't for a handful of stalwarts, like the energy giants BP (LSE: BP) and Royal Dutch Shell (LSE: RDSB), which have been buoyed by surging oil prices and are currently on prospective dividend yields of nearly 7%, and household goods giant Unilever (LSE: ULVR) and its increased dividend, the picture would look a lot gloomier.
The cuts we are seeing in dividends will also rebound on things like pensions and insurance companies, both of which rely on a regular stream of income. And that in turn will feed back on some of the companies that were the authors of the cuts in the first place. BT, for example, is struggling with its own pension fund deficit, and that can only be made worse by future falling dividends.
The future?
Any of us who own shares that we think pay safe dividends should be careful not to be too complacent, because they might still be cut even if the companies are currently looking healthy. One of the purposes of paying a high dividend is to compete for investors, and if competitors have already been forced to cut their dividends, others in the same sector might decide to cut theirs by a smaller amount, retain more profit to help them over the recession, and still remain relatively attractive to shareholders.
And something like that might turn out be a good policy, as we still really have no idea how long the current recession will last, or whether it will deepen further before things get better. As the recession is global, and many of the FTSE's highest dividend payers operate internationally, currency exchange fluctuations will add further uncertainty to sterling-denominated earnings, which might make again lead some companies to favour the retention of more earnings and to lower their dividend payouts.
What can we do?
The most important thing we can do, as private investors, is to be very wary of shares that look like they're on a very high dividend yield, but which may well not be able to maintain it. What we should really be looking for is a good dividend cover, with rising earnings forecasts for the next few years, and low and falling levels of debt. Companies that don't offer those might well turn out to be dividend shares you can't depend on.
What we want is more BPs and Unilevers, and fewer struggling banks and airlines.
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