Dividends during COVID-19
COVID-19 is testing corporate Britain in a way not seen since the Second World War. Its effects are going beyond even the global financial crisis, with this being a health crisis first and an economic one second.
For companies, these are incredibly challenging times as they work flat out to deal with the immediate fallout to ensure their long-term future.
Investment managers, who hold a third of the FTSE, have an important role to play in supporting companies through these tumultuous times. That is why last week the IA wrote to every company in the FTSE 350 outlining the ways in which we’ll look to help them steer the ship through unchartered waters.
In addition to laying out where the industry would help, it also offered some honest advice, including our member’s views on dividend payments.
We will support, and expect, boards to take decisions based on what is best for their business over the long-term. While we recognise there can always be a tension between long term thinking and short term actions, this is not the moment to be prioritising short-termism. We recognise that dividend payments may not be achievable in light of the current market conditions, as companies look to preserve cash and focus on their financial commitments to their employees and suppliers.
We also know that there are companies who’ve been asked by their regulator to put their dividend payments on hold in order to maintain a cash buffer. For example, in the case of the UK banks, which were asked by the Prudential Regulation Authority (PRA) to suspend dividends of almost £8 billion.
But it would be a mistake to assume cutting or ceasing dividends is automatically the right thing to do in every case. Far from it. In the midst of this crisis we should not lose sight of the crucial role that dividends play in the wider economy.
Millions of pensioners and workers across the UK are shareholders. These are the very people whose money our industry invests in companies in order to produce a return - a part of which comes from those dividends, which some are calling for to be suspended during this crisis.
These people are relying on this vital regular income to support themselves in retirement. Beyond individuals, charities and local authorities also depend on dividend payments to support their initiatives. In total the FTSE returns around £120bn in dividend payments, hence their importance to all parts of the economy.
So our message to companies is simple: dividends reductions and suspensions are acceptable if it means the survival of an otherwise healthy business (or of course if ordered to do so by the regulators). But maintaining a dividend payment is the best approach as its helps support savers across the country.
A word of advice too for companies which may be tempted to reduce their dividends; public opinion is unlikely to look favourably on those companies that take this action and do not simultaneously consider their approach to executive pay or bonuses. It goes without saying, that any company that seeks financial support from government, furloughs its employees, or indeed sees a windfall profit from the crisis should seriously consider dampening down its executive remuneration policies.
Once these challenging times have passed, shareholders will expect companies to restart their payments to their shareholders as soon as it is prudent to do so. In the meantime, we will stand together with British businesses to weather the storm.