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Britain's fat dividends face biggest slimdown in Europe

[LONDON] British firms have traditionally yielded an outsized portion of Europe's dividends. For investors accustomed to steady payouts, the pandemic is about to cause outsized pain.

"In the UK the impact is going to be largest, insofar as there is a larger group of income investors here," Joachim Klement, an analyst at Liberum, said by email.

UK constituents of the Stoxx Europe 600 Index paid out more than US$120 billion during fiscal 2019, more than a quarter of the benchmark's total. That's by far the largest amount of any country, ahead of France's US$69 billion and Germany's US$53 billion, according to data compiled by Bloomberg.

But on Tuesday, the British Treasury barred recipients of state-backed loans from future payouts. It doesn't bode well for a recovery in British dividends, the prospects of which are already bleak: estimates compiled by Bloomberg suggest a 35 per cent decline in the new fiscal year, meaning payouts would shrink by more than US$40 billion. This would be the largest fall among major European countries, both in percentage terms and on an absolute basis.

"In many cases, changes to dividend policies reflect the inability to predict when things return to normal, but a new factor is the consideration of the relationship between government support and company behaviour," Ben Lofthouse, co-manager of Global Equity Income at Janus Henderson, said in emailed comments.

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Banks and insurers are heavily represented among Britain's largest companies, so the Prudential Regulation Authority's warning to preserve capital on March 31 hit the country's payouts especially hard. With first-quarter earnings largely released, almost 50 per cent of UK Stoxx 600 members delayed or cancelled dividends, the highest ratio among major European countries.

Market prices indicate an impact beyond 2020. The futures tied to one-year cash payouts of benchmark indexes in 2021 have fallen by more than 40 per cent both in the UK and Europe, with FTSE 100 contracts rebounding a little slower than Euro Stoxx 50 futures.

In this environment, "classic defensive sectors" including food, drink, tobacco, utilities, food retailers, health care, and basic consumer goods are the safest picks, according to Kit Atkinson, head of capital markets for corporate markets Europe, the Middle East and Africa at Link Group. "We have already seen how they have continued to see great demand for their goods and services as the pandemic has unfolded."

Sectors particularly at risk are leisure, transport and energy, Mr Klement said in emailed comments.

"What surprised us was that even companies that could easily afford to pay a dividend like Royal Dutch Shell chose to cut or suspend it," he said. "This only makes sense if company management believes it can boost the share price after the crisis by reintroducing the dividend."

Indeed, even scrapping dividends and lowering planned capital investment "may not be enough to face the sharp drop in revenue caused by months-long lockdowns", leading to firms raising more debt than last year, Societe Generale analysts led by Roland Kaloyan wrote in a note on Wednesday.

There are about 32 billion pounds (S$55.46 billion) worth of pending dividends in UK listed companies that in normal times would be paid over the remainder of 2020, Peel Hunt analysts Charles Hall and Clyde Lewis estimated on May 15. The five sectors offering the most potential payouts are mining, utilities, oil and gas, consumer and insurance.

"While many of these dividends will not be paid, the market will be looking hard for income within this group of companies over the coming months," the analysts wrote.

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