Investors rethink income plans as businesses scramble to cut dividends

More than £3.8bn of income has been withdrawn with more companies set to follow

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Struggling firms have axed billions of pounds of dividend payments as they reel from the damage caused by coronavirus, dealing a brutal blow to legions of savers who rely on the cash for a steady income.

More than £3.8bn of expected pay-outs have already been abandoned by FTSE 350 companies this month as they hunker down amid a global suspension of everyday business.

On 25 March, firms cut almost £1.4bn of dividend payments in an effort to conserve cash. Housebuilder Persimmon has been the biggest name so far, cutting £750m from its payout (this includes both its ordinary dividend and expected special dividend). Other big names to have taken action include betting company building materials firm Taylor Wimpey and broadcaster ITV. 

More pain is expected in coming weeks as firms scale back and March 2020 is on track to beat the record for dividend cuts in a single month – November 2008.

Companies with large cash reserves, that have managed to avoid the worst of the market falls, may continue to pay dividends. However, others that do not have the capital to withstand a sudden drop in revenue could be forced to cut.

Telegraph Money looks at the stocks most likely to reduce or scrap their payouts.

Airlines and travel companies

Flights have been cancelled and airlines forced to make redundancies or limit staff pay while planes are groundedEasyJet and British Airways owner, International Consolidated Airlines, have warned about the perilous situation their businesses face. An airline trade body suggested many major carriers could end up going bust.

Richard Hunter of fund shop interactive investor said: “With cash flow drastically reduced, it is difficult to see how they could justify or afford dividends in the short term."

IAG said its dividend was announced in February but still needs to be approved by shareholders at its annual general meeting in June. A spokesman for EasyJet said the dividend has already been declared and approved so will go ahead as planned for this year.

Amisha Chohan of wealth manager Quilter Cheviot added that cruise ship companies are also struggling. “P&O owner Carnival and rivals have such a high cost base that a drop in sales has a significant impact on profits meaning the dividend is likely to be scrapped.”

Retail

With consumers staying indoors, the already under-pressure high street will continue to suffer. Spending on necessities may increase so supermarkets and those that sell soap or toiletries such as Reckitt Benckiser and Unilever may be able to afford to keep their dividends.

However, Rob Morgan of fund shop Charles Stanley said people have been cutting back dramatically on non-essential goods. “It is also instructive to consider how indebted a company is. Household names that are likely to struggle on the dividend front: M&S and TalkTalk,” he said.

A spokesman for TalkTalk said: “We are comfortable with our overall debt position, particularly in light of the announced sale of our FibreNation for £200m. We see no current risk to dividend payments in spite of the current climate.”

Oil

BP and Shell are two of the largest companies and dividend payers most income funds and investors have own shares. However, the oil price falling from more than $60 (£50) per barrel to $30 will make a dividend cut almost inevitable.

Richard Hunter at fund shop  interactive investor said: “Also, with nobody flying and, it would appear, no-one driving, demand seems likely to fall.”

However, BP and Shell have long track records of paying dividends – the latter has paid every year since World War Two.

Banks

The Bank of England cut interest rates in response to the economic shock from coronavirus. However, banks, another major dividend-paying group, will struggle as the net interest margins, the difference between what they can borrow and lend at, will fall as it is directly linked to the Bank Rate.

Helal Miah of fund shop Share Centre, said more and more companies we also be unable to afford their banks loans and defaults will rise. “This will put pressure on margins and the ability to continue generous dividends,” he said.

Miners

The large mining groups' profitability is also under threat. Typically the biggest factor in metal sales is the Chinese economy, however, much has come to a standstill as to continues its fight against the virus.

Mr Miah said: “Should China’s growth slow down significantly, we will be concerned about the ability of the more indebted companies such as Anglo American and Glencore than better managed group’s such as Rio Tinto of BHP Group.”

A spokesman for Anglo American said: "Our dividend is a function of underlying earnings, with a 40pc payout ratio, so the absolute level of the dividend moves based on the movements in underlying earnings."