Markets attempt to put on a brave face, and a dividend suspension trend could be emerging

“As the UK becomes the latest country to announce stringent self-isolation measures to suppress the coronavirus, markets are attempting to put on a brave face about the outbreak,” says AJ Bell Investment Director Russ Mould.

“The FTSE 100 was up in early trading on Tuesday after a strong showing for Australian stocks. US futures also pointed to a higher open on Wall Street, following a devastating rout yesterday, but futures markets are becoming a less predictable guide in these volatile times.

“European markets including the DAX were also advancing. Two of the things sought by investors are at least beginning to be put in place, namely that central banks are providing massive liquidity and lawmakers are offering spending and support to cushion the impact. The tricky bit now is containing the virus.

“The market has moved to price in a slowdown but we still don’t know how high the economic cost of measures to suppress the virus might be and how long they might last.

“Global catering giant Compass was the largest faller on the FTSE 100 as it outlined as much as a 30% hit to its first half revenue from these containment measures. Notably this impact has only been felt in the last month of the six-month period in question.

“The immediate departure of the man running British Gas owner Centrica, Iain Conn, was taken positively by the market. He had already been lined up to go after a very tricky spell for the company. New chairman Scott Wheway showed some steel by pushing him out the door, appointing finance chief Chris O’Shea as the new chief executive on an interim basis.

“Oil prices remained under pressure, while gold traded modestly higher as it looked to regain some of its mantle as a safe haven after being caught up in the widespread selling across asset classes.”

Dividends: William Hill and Shoe Zone

“Coronavirus disruption is likely to see many companies temporarily suspend their dividends. William Hill and Shoe Zone have already confirmed they are not going to pay the usual cash reward to shareholders and other companies are likely to follow suit, potentially coming in quick succession.

“A sharp, sudden downturn in trading means management have to think on their feet. Cutting jobs is one way of saving money but that is a drastic measure which causes personal devastation for employees and isn’t the behaviour of a good corporate citizen. Instead, not paying a dividend can be an easier way of saving money on a short-term basis.

“Investors may argue they would be losing out yet the coronavirus is an exceptional circumstance. It is causing turmoil around the world and from a moral perspective doing without a dividend is the least investors can do to help protect a company and its workers.

“To give you some idea of how much companies pay each year in dividends, William Hill’s most recent annual financial results saw it pay out £90 million to shareholders. That covers a lot of salaries for people working in its shops and helping to keep its websites ticking over.

“Dividend bills for many other mid to large sized companies are hundreds of millions, sometimes billions, of pounds a year.

“Dividends are a form of compensation for the risks involved in buying a company’s shares. Some investors would argue that the dividend is a saving grace when markets fall as at least they are still getting something back despite a drop in the value of their capital.

“For example, during the last commodities market slump, miners were paying generous dividends to their shareholders as a way of thanking investors for their patience before the next uptick in metal and mineral prices.

“A one-off suspension of the dividend could give some companies some breathing space if they are financially stretched by the coronavirus disruption. However, it mustn’t be an excuse for any company to stop payments simply because some of the peer group are doing it.”

These articles are for information purposes only and are not a personal recommendation or advice.