Has income turned a corner?
After bidding a less-than-fond farewell to a year many will wish to forget, the question for income investors is whether things will come good in the next 12 months.
The story of dividends in 2020 is well known. Hit by pandemic-induced lockdowns and a once-in-a-generation economic dislocation, the big dividend names of the income world more or less shut up shop from March onwards.
In the UK alone, more than half of FTSE 100 firms cut, deferred or cancelled over £37bn of dividend payments in response to the Covid-19 crisis.¹ In the US, 42 companies in the S&P 500, mostly in the hotels, airlines and retail segments, suspended dividend payments from March through July.²
A difficult year for dividends. But have we turned a corner?
Source: Societe Generale, 18 December 2020
But that was 2020 and with a new year comes new hope. Already developments are encouraging. In December, for instance, regulators allowed the UK’s biggest banks to resume dividend payments. Meanwhile, the rollout of effective vaccines brings the end of the pandemic ever closer. For the first time in a long time companies are beginning to look to the future with a sense of optimism.
For Jon Bell, of Newton’s³ income team, a return to business confidence could be the defining factor of 2021. For management teams it would mean enhanced visibility into the end of this recession and could also be the catalyst for the reinstatement of both forward-earnings guidance and dividends, reversing some of the cuts seen this year. “In short,” he says, “it means the beginning of a return to economic normalisation.”
Bell describes recent dividend trends as positive, observing, for instance that within the Global Income portfolio companies like Inditex and Ferguson, which had previously suspended their dividends, have announced a resumption of payments.
Elsewhere within the portfolio, Bell notes the latest news flow on Richemont and Informa – two strong recent performers in the portfolio – has been encouraging, with both companies expected to resume paying a premium level of income within a reasonable time frame.
“Income will return,” he concludes. “However, not all companies will be able to restore dividends to previous levels, as the pandemic has accelerated some of the key themes that were already in place. Our ‘smart revolution’ and ‘Earth matters’⁴ themes, for instance, have clearly accelerated and income funds will need to be mindful of the structural challenges posed to income generation as a result of the rapid thematic change.”
¹ This is Money: ‘The top dividend payers of 2020: Income from FTSE 100 firms was slashed 20%, but these 16 blue-chips are paying out’, 14 December 2020
² The New York Times: ‘Dividends Are Down, but They Are Vastly Better Than Expected’, 20 November 2020
³ Investment Managers are appointed by BNY Mellon Investment Management EMEA Limited (BNYMIM EMEA), BNY Mellon Fund Management (Luxembourg) S.A. (BNY MFML) or affiliated fund operating companies to undertake portfolio management activities in relation to contracts for products and services entered into by clients with BNYMIM EMEA, BNY MFML or the BNY Mellon funds.
⁴ Newton’s ‘earth matters’ theme focuses on areas such as clean energy, efficient infrastructure and resource management. In 2019, the Sustainable Global Equity Income strategy was launched with the aim of generating stable returns by harnessing equity income from companies with sustainable business models.
The value of investments can fall. Investors may not get back the amount invested. Income from investments may vary and is not guaranteed.
GE214726 Exp: 13 April 2021