Following the unprecedented dividend cuts we saw across the UK market earlier this year, it finally appears there is some light at the end of the tunnel. During the first wave of the pandemic, the Link Group produced their Q1 dividend report which detailed a best case dividend scenario for the UK market of -27% in 2020 compared to 2019. As it became clear the impact of the pandemic was going to be more drawn out than the initial expectations, the subsequent Q2 report saw a downgrade to the best case scenario to -39%, with 2020 being described as ‘the biggest hit to dividends in generations.’ As we moved through the summer and the severe restrictions imposed on activity were relaxed somewhat, the downgrade trend in dividend estimates appears to have relented and in fact, September saw net dividend upgrades1 for the FTSE100, the first time since August 2018.
Opinions, estimates, forecasts, projections and statements of financial market trends are based on market conditions at the date of the publication, constitute our judgment and are subject to change without notice. There can be no guarantee they will be met.
In recent weeks we have seen a number of UK Housebuilders return to the dividend table, buoyed by steady house prices and a surge in demand driven by the Chancellor’s stamp duty holiday. Banks have yet to make a dividend comeback, despite strong capital ratios and limited impairments as the regulator continues to encourage them to preserve capital for lending purposes, however, I expect this to change as we move into 2021. Post the historic dividend cuts by Royal Dutch Shell and BP over the summer, the Oil & Gas sector is now paying dividends at a more sustainable payout level. The mining sector remains a shining beacon amongst the fog of dividend cuts, with resilient commodity prices and limited disruption to operations allowing many companies in the sector to continue to pay dividends.
Barring a new multi-month period of lockdown measures, I believe we are at, or very close to, the trough for UK dividends as evidenced by the charts above as companies have adapted to the new environment and imposed significant cost-cutting measures to make operations more efficient. With regards to dividend announcements, companies have understandably erred on the side of caution and this should lead to strong dividend growth, perhaps ahead of consensus expectations, as we move into 2021. Despite the cuts we have seen, the FTSE All-Share remains one of the highest yielding equity markets globally, with a current 12 month forward yield of over 4% (Bloomberg as at 21/10/20). In addition, the valuation picture relative to other markets is highly attractive, with the MSCI UK sitting at the largest discount to the MSCI World for more than four decades.
The JP Morgan UK Equity Income fund focuses on balance sheets, cash generation and sustainability of earnings, amongst other things, and as a result, the income premium offered to the FTSE All-Share has increased over the last six months with the 12 month forward dividend yield of the fund currently at 4.53% (underlying equity portfolio of the fund). The fund adopts an unconstrained approach, scouring the entire UK market with no constraints on stocks, sectors or payers/non-payers. We seek out a balance of high growth stocks, compounders, and high yielders which combines to offer an attractive dividend along-side capital growth. This unconstrained approach, together with the support of a well-resourced team, allows us to seek out hidden gems across the market, naturally leading us to be overweight in the small and mid-cap arena. The combination of the above has led to pleasing performance over the last 12 months and since the launch of the fund in May 2017. In the 12 months to the end of September 2020, the fund has outperformed the FTSE All-Share by 5.6% and sits first quartile in the peer group over 1 and 3 years2.
1 Peel Hunt data using a simple number of upgrades: number of downgrades.
2 Yield is not guaranteed and may change over time. Past Performance and yield are not a reliable indicator of current and future results