Dividend prospects for 2021: return to normality or permanent reset?

We discuss the likely outcome for UK dividends in 2021 and which companies you should keep an eye on.

In the past, cuts to the dividend have been accompanied by sharp share price falls.

Usually these would be as a result of investor disappointment, surprise and potential alarm bells on the company’s financial position.

During this year, however, such reactions disappeared.

The pandemic at its height caused a virtually global shutdown for three months, leaving many companies with the headache of fixed costs but vastly reduced income. 

As a result, the red pens came out. Severe cuts to capital expenditure, discretionary costs, share buyback programmes and the dividend were all made in an effort to shore up the financial position. These measures were often in tandem with access to additional liquidity provided by the banks in the event of additional funds being required.

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If 2021 sees something of a return to economic normality as a result of the rollout of the Covid-19 vaccine, will dividend payments follow suit? Or has 2020 provided the perfect opportunity for companies to reset dividend payments for the foreseeable future?

One of the previous draws of the FTSE 100 index had been a punchy average dividend yield, usually somewhere between 4% and 4.5%, which was attractive in comparison to many other global markets.

The reduction of this yield, coupled with the exposure of the index to the likes of the banks and oil sectors, let alone the uncertainties surrounding the UK’s fortunes following Brexit negotiations, made the index “uninvestable” in the thoughts of many international institutional investors.

As such, a return to form for dividends would be an important and positive development next year.

The picture is not as bleak as it may have seemed in monetary terms, and although dividend payments were reduced at the low point by an estimated £40 billion, some have now returned. Indeed, the current estimate is that in monetary terms around 80% of payments have remained intact.

There have also been some companies which have paid throughout and, in the case of British American Tobacco (LSE:BATS), actually raised the dividend throughout the year.

In terms of the largest dividend payers, the gaps have largely come through the oil and banking sectors.

The oil price remains down by 25% in the year to date and the oil majors have had to make significant provisions, let alone the growing pressure on them to invest in renewable technologies. Indeed, the cost of this major and multi-decade transformation will be huge and may have a long-term impact on shareholder distributions.

Even with BP (LSE:BP.) halving its dividend and Shell (LSE:RDSB) cutting by two-thirds, the shares still yield 8.9% and 5.8% respectively, although these figures will have been inflated by the share price decline on each – in the year to date, BP are down 46% and Shell 44%.

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The banking sector was unable to pay dividends due to strong regulatory advice not to do so.

For 2021, however, the recent announcement that the dividend shackles would be lifted was positive for income-seeking investors.

It was clear from the recent third-quarter reporting season that the banks were adequately capitalised and capable of returning to dividend payments. Indeed, most of the banks expressed a desire to be allowed to announce dividends at their full-year results in the new year.

It remains to be seen whether the banks will return to such payments with all guns blazing, depending on the economic situation at that time. However, given the level of the dividend yield prior to the imposition of the cuts, it is clear to see why this is a positive development – as of March, Lloyds Banking Group (LSE:LLOY) was yielding around 10%, Barclays (LSE:BARC) 9.6%, HSBC (LSE:HSBA) 8.2%, Standard Chartered (LSE:STAN) 4.4% and NatWest (LSE:NWG) 4.3%.

In terms of a return to some kind of economic normality, different sectors will recover at different speeds.

Some companies will take the opportunity to base the return to payments at a lower level, either because they remain unsure on the outlook, or because those companies which have had the benefit of state support or made several thousand staff redundant will be keen to be seen as morally responsible, thus keeping payments down.

In the meantime, a number of income solutions remain, with some punchy yields from companies which have seen fit to maintain dividends. 

The likes of British American Tobacco (7.7%), Rio Tinto (LSE:RIO) (5.1%), GlaxoSmithKline (LSE:GSK) (5.9%), Unilever (LSE:ULVR) (3.4%) and AstraZeneca (LSE:AZN)  (3%) have proved to be income havens.

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Whether the FTSE 100 sees a complete return to the previous levels of payments remains to be seen, but with the record of the largest blue-chip payers largely having remained intact, and with the banks yet to come, the prospects are extremely encouraging.