The London Business School noted earlier this year that since 1900, British stocks have gained 5.1% a year in real terms with income reinvested. But capital gains amount to a mere 0.4% a year. This highlights how crucial dividends are to long-term returns. That means it’s particularly unfortunate that “the roster of blue-chip dividend cutters gets bigger by the day”, as Nick Hassell puts it in The Times. British Airways, M&S and BT are the latest to hit the headlines.
Profitability is slumping and many firms are grappling with high debts, forcing them to preserve capital. Gaping pension-fund deficits are also lowering dividends. Chris White of Threadneedle reckons that up to 30% of companies could lower or abandon their dividend this year. According to traders’ bets on NYSE Liffe, the derivatives exchange, FTSE 100 dividend payments are set to fall by 30% next year – having already slid by 19% from last summer’s peak, says Hassell. Standard Life’s estimate is less gloomy, but its forecast for a 35% fall in dividends in 2009 and 2010, would still be the worst since 1918-1919.
To gauge prospects for dividends, watch two factors: the oil price and the dollar/sterling exchange rate. BP, Shell, Vodafone, HSBC, GlaxoSmithKline, BAT and AstraZeneca account for half the dividend base of the FTSE All-Share index, says Adrian Cattley of Citigroup. The weak pound has so far bolstered firms like these, which derive a large proportion of profits from overseas, as foreign profits are worth more when converted back to sterling.