Cash may help many FTSE 100 companies get through the current volatile times better. As businesses look for ways to conserve cash, a large number of companies are announcing dividend cuts. Today I’d like to discuss a stock that may now be appropriate for passive income seekers.
Are dividend cuts the new normal?
For many industries, such as aviation and travel, the current uncertainty may be one of the worst crises they have faced. It has meant difficult decisions regarding their operations, as well as their dividends.
Recent days have seen dividend cuts announced by a plethora of FTSE 100 companies, including:
- Barclays – multinational investment bank
- Barratt Developments – housebuilder
- British Land – real estate investment trust (REIT)
- Bunzl – distribution and services company
- Carnival – cruise operator
- Centrica – British Gas owner
- Glencore – British-Swiss miner
- HSBC Holdings – global bank
- International Consolidated Airlines Group – parent group of several airlines including British Airways
- InterContinental Hotels – multinational hospitality company
- ITV – broadcaster and content producer
- Lloyds Bank – UK banking giant
- Meggitt – engineering firm
- Melrose Industries – engineering group
- Rentokil Initial – pest control group
- Rightmove – real estate website
- Royal Bank of Scotland Group – UK banking group
- Smiths Group – engineering company
- Standard Chartered – multinational financial services group
- Persimmon – housebuilder
- Taylor Wimpey – housebuilder
- Whitbread – owner of Premier Inn
- WPP – advertising giant
What can income-seeking investors do amid a growing number of dividend cuts? Well, they may now want to look for companies that don’t necessarily have to trim dividends.
Safety in utilities
As you research companies that are likely to keep paying dividends in the coming months, it will be important see if a company’s earnings can support the payout. When companies pay more than they earn, then dividend cuts may be in the cards.
One company I’d consider including in my portfolio now is FTSE 100 member Severn Trent (LSE: SVT). The utility company serves almost 8m people. Its management believes the group offers “a valuable combination of reliable earnings, long-term asset growth and an inflation-linked dividend”.
SVT is one of the nine stocks recently identified as key picks in uncertain times by analysts at Morgan Stanley. This is because no matter how the economy fares in the near future, we’ll all need to continue using water and other utilities in our daily lives.
On 31 March, the group issued a trading update. In it, management said it expects “no material change to current year business performance. We continue to expect the Group will deliver full-year trading performance in-line with previous guidance”. These words are likely to bring relief to its shareholders who may be nervous that the company could be axing dividends.
Year-to-date, SVT stock is down about 14% and its price is hovering around 2,150p. Its recent decline has pushed the dividend yield to about 4.4% and the shares are expected to go ex-dividend next in June.
Cancelling dividends is a sacrilegious act for many investors, but this is uncharted water for the global economy. In the coming weeks, other FTSE 100 and FTSE 250 companies are likely to release trading updates that may include dividend cuts.
Income-oriented investors may now be looking for safe harbour. The good news is that there are companies out there that are unlikely to cut their dividends. Look for companies that can fund their payments from operating cash flows.
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tezcang has no position in any of the shares mentioned. The Motley Fool UK owns shares of Melrose. The Motley Fool UK has recommended Barclays, British Land Co, Carnival, HSBC Holdings, InterContinental Hotels Group, ITV, Lloyds Banking Group, Meggitt, Rightmove, and Standard Chartered. 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.