Why companies aren’t cutting dividends

Investors treating shares like bonds makes it much harder for companies to cut dividends – another unintended consequence of bad monetary policy.


We need to talk about dividends, says Alan Livsey in the Financial Times today. He's right; we do.

As he points out, in a normal world, "dividends come out of a company's cash flow once the finance director has figured out how much he or she needs to spend on investment."

So as commodity prices have tumbled and the cash available to producers is less than is needed to sustain dividend payouts, you would expect all dividends to be cut in a hurry. That hasn't happened.

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Sure, some of the big UK-listed players have cut a bit (Glencore, Anglo and Vale). But others have not. Look at Shell and BP, who pay out around 20% of total UK dividends between them. "In two of the past three years, both of these super majors have had to sell assets to help pay their dividend bill."

Why haven't they been cutting dividends? Livsey doesn't give us the answer. But might it be yet another unintended (and bad) consequence of super low/negative interest rates?

Given the paucity of returns elsewhere, ageing investors across the West have handed their cash and their faith over to income fund managers in the hope of keeping their retirement shows on the road: they have stopped treated equities as growth assets and started treating them like bonds. And while the yield on shares in these companies might be 8% today, it will be much less on the purchase price of most investors.

Perhaps companies know that and they know that when they lose the faith of an income-dependent shareholder (institutional or retail) it is going to be tough to regain. That makes it much harder for them to cut dividends, despite the clear need for them to do so. One more thing for you to add the growing list of perverse effects of bad monetary policy.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.