HAMISH MCRAE: Dividends are vital to economic demand

The dividend drought has begun. For people who rely on dividends for their income, either directly or indirectly through their pensions, the past three or four weeks have been a catastrophe. 

Share prices may have clambered back some 20 per cent from their lows of March 23, when the FTSE100 index dipped below 5,000 – though the April recovery looked a little wobbly by Friday. 

But we all know that capital values are capricious, reflecting the mood of the moment. Dividends are real. Or at least they were. The best guess now is that this year dividends for FTSE100 companies will be halved. 

Dividend drought: But share prices may have clambered back some 20 per cent from their lows of March 23

The numbers are very big. Last year, UK companies paid out just under £100 billion in dividends. So that could take out £50 billion in payments – money that would have paid pensions or would have been recycled back into the economy in other ways. 

The largest single contributor into that dividend pot is Shell. So it came as a huge shock last Thursday when Shell disclosed it would cut its first quarter payout by twothirds. This was the first time it had cut its dividend since the Second World War. 

You can see the reasons for this in the collapse of the oil price. But if you look at what it has come through over the last 75 years – the Suez Crisis, the oil shocks of the 1970s, the dotcom bubble, the crash of 2008/9, the oil price collapse of 2014/5, and so on – you have to ask whether what is happening now is really worse than all that. 

BP actually increased its dividend, which is helpful, but it is smaller than Shell and it may have to trim payments if the oil price does not recover later this year. 

This blow comes on top of the collapse of dividends from elsewhere. You would expect retailers to be stunned by all this, so the scrapping of this coming year’s payout by Marks & Spencer came as little surprise. We will have to see what Tesco decides for next year. 

Three weeks ago, it controversially increased its dividend for the year just ended, arguing that the dividend should relate to the trading period in question rather than current conditions. 

There is logic in this, but to many people it does not look good to be taking a business rates holiday while jacking up payments to shareholders. And there lies the crux of the problem. 

In tough times, paying out large dividends does not look quite right even if companies feel they can afford them. There is a further twist for financial companies. 

Now, not only do dividends look iffy in public relations terms, but the Bank of England does not like dividends either. A month ago, the Bank’s Prudential Regulation Authority told the banks to scrap their dividends for this year. Even though HSBC, the biggest, makes 80 per cent of its profits from Asia it had to comply. 

If HSBC were to choose to move its legal domicile away from the UK, this may turn out to have been a tipping point, but let’s see. 

Insurance companies have been similarly advised by the PRA to hold back payments. Several of them – including Aviva, RSA, and Direct Line – have complied. Legal & General did go ahead with its payment, and has won some plaudits as a result. 

Veteran fund manager Richard Buxton, head of UK equities at Merian Global Investors, said last week: ‘It was easy for the financial regulator to go, ‘Oh, first sign of trouble, let’s just suspend dividend payments and if things pan out not too bad, then you can pay them all back again.’ 

‘I applaud Legal & General for saying, ‘Well, we hear you but, no, bog off we still think that we have gone through all our stress tests.’ 

There is a wider point here. Any regulator’s job is to urge prudence. But that decision over bank payouts knocked £7.5 billion off dividend payouts. 

Pressure on the insurance companies will, on my quick tally, have pushed the number well above £10 billion. 

This week, we get the Bank of England’s new forecasts for the economy. We know, of course, that they will be dire. But we know too that what matters in the recovery, as and when it comes, will be consumers’ willingness to spend. People are worried. 

Savings have shot up, probably to the highest level for a generation. Does it really make sense for pensioners who, directly or indirectly, rely on their income from dividends to have those incomes further cut by Bank of England diktat? 

Dividends are vital to economic demand. Adding to the anti-dividend chorus is nuts.

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