Will the other top UK dividend payers follow Shell's lead?

We review whether the other big six income stocks will join Royal Dutch Shell and UK banks in cutting or suspending dividend payments. 

Royal Dutch Shell has become the fourth member of last year’s top 10 UK dividend payers to reduce income payments to UK investors.

The oil major cut its dividend for the first time since the Second World War in a bid to put the business on a more resilient footing, following collapse in the oil price following the outbreak of coronavirus. 

Its decision to cut the dividend was undoubtedly a difficult decision to make; however, that decision was taken out of the hands of management at fellow top-10 dividend payers HSBC, Royal Bank of Scotland and Lloyds Banking Group.

The country’s biggest banks, in a series of co-ordinated statements at the start of April, announced that they would temporarily suspend dividend payments and share buybacks for both their 2019 and 2020 financial years, following talks with the Bank of England. The suspensions were made to put banks in a better position to support the economy during the current uncertain climate. 

Will the other six members of the top 10 UK dividend payers, which accounted for 64% of total dividends for the UK market in 2019, follow suit?  

Of the top three payers, Royal Dutch Shell and HSBC will be leaving income investors feeling short-changed in 2020, but the same cannot be said for BP.

The oil major, which updated the market two days before Royal Dutch Shell announced its cut, has raised its dividend for the first quarter of the year to 10.5 cents a share, up from 10.25 cents a share. It did so against the backdrop of a slump in its underlying profits, down by two-thirds in the first quarter of 2020 versus the same quarter a year earlier. The second quarter payment, though, is far from guaranteed. Its dividend yield is just over 10%.

Also providing recent market update was GlaxoSmithKline, the sixth biggest dividend payer in 2019. It has opted to keep its dividend payment flat at 19p per share for the first quarter. Its dividend yield is 4.5%.

Fellow pharmaceutical giant AstraZeneca, the ninth biggest UK income payer in 2019, has a lower dividend yield of just under 3%, but is viewed as being stable as the firm has produced slow and steady dividend growth over the past decade.

Another top 10 member expected to retain dividend payments is British American Tobacco. Being highly cash-generative, tobacco companies tend to pay reliable dividends. In a recent statement the firm was bullish, stating there has been little impact on consumer demand for its products following coronavirus. As a result, the firm said its dividend will grow in sterling terms.  

Elsewhere, the two mining members of the top 10 are continuing to pay dividends in the short term: Rio Tinto and BHP Group. Mining, of course, is a highly cyclical sector, so there are serious question markets over whether dividends will be maintained. But in 2019 the sector produced the greatest source of dividend growth, with both Rio Tinto and BHP Group paying special dividends, having sold assets and strengthened balance sheets over the previous couple of years.

Earlier this year, ahead of coronavirus escalating to a global pandemic, Michael Kempe, chief operating officer at Link Market Services, cautioned that 2020 looked likely to record for the worst dividend growth rate in five years.

This forecast stemmed from the fact that the UK market had become reliant on the ability of mining companies to increase dividend payments as less than half of the 15 highest dividend payers in 2019 announced a higher dividend than in 2018. 

He added: “If anything, another strong performance from the mining sector (in 2019) highlights how UK dividend growth is precariously reliant on eye-catching increases from two or three big companies in a highly cyclical industry.

“It’s worth remembering that just four years ago, the mining sector slashed payouts by half to cope with a commodities downturn.”