Income seekers face dwindling dividends
With profitability slumping and many firms grappling with high debts, blue chip companies are cutting dividends at an alarming rate.
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.
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