FTSE shows signs of life and dividend suspension becomes the big story on the markets

“It is very early days and there are almost certain to be further twists and turns to come in the coronavirus crisis and its impact on markets, yet Friday’s solid early advance for the FTSE 100 was welcome, as it built on its gains yesterday,” says AJ Bell Investment Director Russ Mould.

“Notably Asian stocks broke their losing streak overnight as central banks across the world stepped up their efforts to mitigate the devastating impact of measures aimed at containing the virus.

“Equity markets are forward looking and while significant economic pain is being felt now, attention is already turning to 2021 when there will be hopes of an end to the disruption.

“Share rallies have often petered out over the course of a trading session in recent weeks so investors will have everything crossed that this one holds.

“InterContinental Hotels was one of the top FTSE 100 risers despite being one of a number of companies to suspend its dividend. Its guidance on recent trading is pretty apocalyptic but that had already been priced in by the market.

“It is a similar story at pubs group JD Wetherspoon; investors know just how bad things are out there for consumer-facing firms and attention is now likely to be on their ability to weather a period of massively depressed or almost zero sales.

“Survival is likely to be a more realistic prospect for larger operators, assuming their balance sheets are in reasonable shape. Though obviously this will depend on just how long lockdown conditions remain in place.

“Elsewhere oil prices surged back above $30 per barrel as US President Donald Trump hinted he might intervene in the price war which erupted when the relationship between Saudi Arabia and Russia broke down earlier this month.

“Gold moved back above $1,500 per ounce as it attempted to reclaim its mantle as a safe port in the current financial storm.”

Dividends: Marks and Spencer, Travis Perkins, Intercontinental hotels, JD Wetherspoon

“First the Bank of England’s rate cuts left individuals with little hope of generating decent returns on their cash savings. Now we’ve had a rapid increase in the number of listed companies suspending their dividend. These add up to an income crisis which is going to hurt a lot of people.

“Actions by the Bank of England and listed companies are necessary to try to prop up the economy, preserve as many jobs as possible, and help everyone in a time of need.

“Specifically on dividends, not paying out a wad of cash to investors will save companies millions of pounds that will give them some financial breathing space during the coronavirus crisis. Many companies need all the help they can get given how a large part of the population is effectively sitting at home not spending in the way they would normally.

“Marks & Spencer, Travis Perkins, InterContinental Hotels and JD Wetherspoon are among the growing list of companies deciding not to pay dividends in the current climate. William Hill and Shoe Zone are other examples and one should expect a lot more companies to follow suit.

“Short-term investors will have to stomach the one-two punch of both a decline in capital (falling share prices) and a reduction in income.

“In a worst-case scenario that the coronavirus cannot be contained quickly, the income issue could become much more severe as historically dividends have accounted for a large proportion of the overall returns for investors.

“Everyone who has enjoyed compounding benefits from reinvesting dividends will know the importance of that shareholder reward in creating wealth.

“As a small mercy, most of the companies suspending their dividend did actually see their share price go up on the news. That is the market’s way of showing relief that the dividend money is being put to good use inside the business rather than being given away.”

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