Markets sink again, banks cancel dividends and Auto Trader unveils shrewd cash move

“Just when people were starting to believe we were seeing a sustained rebound, markets go straight back into reverse. The FTSE 100 fell 4% on Wednesday morning to 5,445 and European markets pulled back by approximately 3%. Asian markets were also flashing red and the oil price retreated 3.3% to $25.48 per barrel,” says Russ Mould, Investment Director at AJ Bell.

“Figures showed factory activity contracting across most of Asia in March and worries about the US intensified amid fears over the severity of the coronavirus on individuals and businesses. Donald Trump warned of a ‘painful two weeks’ as officials predicted up to 240,000 US coronavirus deaths.

“Dragging the UK market down was news of dividend cuts among banks and weakness in other parts of the financial sector, namely life insurers and asset managers

Dividends and fundraisings: Banks and AutoTrader

“Several million investors will be feeling miserable today at the news that Lloyds and other big banks will not be paying a dividend in 2020. The banks have been under pressure to preserve cash during a testing time for the UK economy, not only to protect themselves but also to have more capital to serve their customers and clients during the coronavirus crisis.

“Banks have historically been a key holding for anyone seeking to generate income from their investments. A history of paying generous dividends is a key reason why so many people held onto their Lloyds shares during and after the global financial crisis, despite the share price being on its knees. Investors hoped the bank would return to form and start doling out dividends left, right and centre.

“In a twist of fate, Lloyds even announced last year that it would increase the frequency of its dividends to once a quarter from June 2020, in recognition that the vast majority of its 2.4 million shareholders were retail investors who would welcome regular payments. That carrot dangled in front of their nose has now been cruelly snatched away at the eleventh hour.

“Nearly a fifth of the FTSE 100 has now cancelled or postponed dividends and the number is likely to get higher while consumers stay indoors and businesses are running on reduced capacity or even laying idle. Companies need to preserve cash to help tide them over in these troubled times and to give them breathing space to get through the crisis.

“While 2020 will go down in history as the year stocks collapsed and dividends dried up, hopefully the world will get back on its feet and return to normality before too long.

“For now, you’re more likely to see companies going cap in hand to shareholders asking for more money rather than giving them cash.

“We’ve already seen food and drink retailer SSP raise a slug of new money to shore up its finances and Auto Trader is now doing the same thing. Securing extra cash now should keep the banks at bay and ensure the automotive portal operator isn’t breaching any debt covenants. Auto Trader is also strengthening its balance sheet to enable it to go hunting for opportunities in the immediate aftermath of the crisis. It’s a clever and shrewd move.”

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