Dividends are a powerful force in investing, especially during bear markets.
Investing for dividends, however, is not as easy as it sounds. When economic conditions deteriorate, companies sometimes cut their dividends, leaving their investors with no income stream. With that in mind, here’s a look at three FTSE companies that have been forced to cut their payouts recently.
Only a few weeks ago, broadcaster ITV (LSE: ITV) said it would be paying a full-year dividend of 8p per share for 2019. And it was planning to pay another dividend of 8p per share for 2020.
Yesterday, however, the company said in order to conserve cash in the wake of the coronavirus disruption, it would no longer be paying its final 2019 dividend of 5.4p per share. And it withdrew its intention to pay that 8p full-year dividend for 2020. This dividend cut is disappointing for ITV shareholders, myself included, who held the stock for its big payout.
In hindsight though, there were a number of warning signs here. For starters, the company cut its dividend in the Financial Crisis. Secondly, dividend growth had dried up recently. No growth is often a precursor to a cut.
Overall, the main lesson here, in my view, is that cyclical shares aren’t ideal dividend stocks. Earnings fluctuations mean they can’t always afford to pay a dividend.
Marks & Spencer
Another FTSE company that has announced a dividend cut in the last week is Marks & Spencer (LSE: MKS). On Friday, it warned that it would be “severely impacted” by the coronavirus and that in the current circumstances, the board did not anticipate making a final dividend payment for this financial year. Analysts had been expecting a final dividend of 6.9p per share.
This is not the first time MKS has cut its dividend recently. In May, the group cut its final 2019 payout by 40%. And then in November, it cut its interim dividend by 40% too. These cuts came after the group held its dividend flat for two years.
A key takeaway here is that it pays to be careful with companies that have recently cut their dividends. If a company has cut the payout once, it may have no hesitation in doing so again.
Finally, InterContinental Hotels (LSE: IHG) has also been forced to cut its dividend. It said on Friday that, in an effort to protect the long-term health of the business, it was withdrawing the recommendation of a final dividend of 85.9¢ per share announced in mid-February. And it will defer consideration of further dividends until visibility has improved. Management added that the group is “conservatively leveraged”. But it said the dividend cut was necessary to ensure that it comes out of the coronavirus crisis as strong as it possibly can.
Of the three companies I’ve mentioned, this cut was the least predictable. Yes, the hotel industry is cyclical. But IHG has an asset-light business model (meaning more flexibility) and a strong balance sheet. It also has an excellent dividend growth track record and has had a high level of dividend coverage in recent years.
Ultimately, this cut really is due to the ‘black swan’ nature of the coronavirus. The lesson for dividend investors? Portfolio diversification is always crucial.
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Edward Sheldon owns shares in ITV. The Motley Fool UK has recommended InterContinental Hotels Group and ITV. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.