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Covid-19 dividend plunge signals trouble for income funds

21 Apr 2020

Nearly half of UK companies have slashed their dividends as Covid-19 continues to lay waste to the global economy, leading to a slump in the performance of income funds.

An unprecedented 45% of listed firms have axed their dividends or were expected to do so by April 8, according to Link.

Pay-outs worth £23.8bn between the second and fourth quarters were jettisoned while a further £23.9bn are at risk of cancellation, the report said.

Kit Atkinson, head of capital markets for corporate markets EMEA at Link, said the cancellations were necessary to protect companies. “If the damage to the economy truly can be limited by government action and if the economy can escape the prospect of a protracted depression, it’s clear markets can recover sooner and further,” she added. “If the news turns out to be worse, they could decline further.”

The report detailed the speed at which the Coronavirus crisis has hit markets, with dividends totalling £28.2bn scrapped within days of lockdowns starting in mid-March. This represented more than one third of the shareholder cash returns that Link had previously expected to be paid during the rest of the year.

The sudden turn follows record dividend payments last year as UK-listed firms cashed out a record £81bn in shareholder incentives with oil companies and banks responsible for the largest pay-outs.

The plunge in dividends has been painful for income funds. Some of the funds which previously ranked among the best performers saw their performance suddenly drop.

This includes Aviva Investors UK Listed Equity Income fund, which saw its performance plunge from a total return of 23.5% to -1.47%. It is now underperforming its benchmark, the FTSE All Shares Index, which by the end of March still reported black figures.

Similarly, Santander’s Enhanced Income Portfolio fund dropped from a total return of 26% last year to -13.46% YTD at the end of March, according to Morningstar.

Man’s GLG Income fund reported a total return of 20.9% last year, its performance has now slumped to -24.11% YTD to the end of March. Financial services firms account for almost a third of the fund’s portfolio.

Funds with significant exposure to financials and industrials were the hardest hit as banks this year’s shareholder payments by £13.6bn, followed by the mining sector.

However, dividend streams from defensive sectors such as food, drink, food retailers, tobacco, healthcare and basic consumer goods are expected to be spared from the cuts.

Link sets out four scenarios for the remainder of the year. Under the best-case scenario dividends would fall by 27% to £71.9bn but under the worst-case they would plunge 51% to £48bn.

A realistic upper bound would see dividends fall 32% to £67.3bn while a realistic, lower bound would see them plunge 39% to £60bn.

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