Shell dividend cut to hurt investors across the UK, Reckitt doing better than expected, and the FTSE continues to push forward

“Driving the FTSE 100 forward 0.5% to 6,146 were the consumer cyclicals, healthcare and utilities sectors,” says Russ Mould, Investment Director at AJ Bell.

“The top FTSE 100 riser was Carnival as it led a rally in the travel and leisure sector which also included strong gains for International Consolidated Airlines and EasyJet as investors started to become more hopeful that the industry will get back on its feet.

“Sainsbury’s dipped 1.6% despite outlining cost saving measures including no cash bonuses for its executive directors and deferring a decision on the dividend until later this financial year.

“Among commodities, oil prices rallied for a second day in a row following signs that US inventories are not growing as quickly as expected. This wasn’t enough to boost shares in Royal Dutch Shell and BP, both of whom fell as investors showed disappointment at Shell’s dividend cut."

Royal Dutch Shell

“Shell’s decision to reduce its dividend is devastating to investors across the country as so many people own its shares directly or through their pension as an important source of income.

“Investors risk putting money into the markets in order to stand a chance of achieving a better return than cash in the bank. While rates on cash savings accounts have been drifting down for a while, investment dividends were widely considered to be much more reliable.

“Sadly that is no longer the case given how more than 300 companies on the UK stock market have this year said they won’t be paying dividends for the time being or paying a much lower level than before. This figure includes 41 companies in the FTSE 100.

“Shell’s actions will affect so many people who are trying to earn a good return on their hard-earned savings. Approximately 160 retail funds and investment trusts in the UK have Shell as one of their top holdings, and many more overseas funds will hold the stock. There are also many pension funds on top who invest in the oil producer.

“Pensioners have relied on names such as Shell for a very long time in order to help pay the bills during retirement. They will be particularly devastated at the news that dividend cheques will be significantly smaller.

“While a cut is better than no dividend at all, many people thought Shell would never go down this path given its long track record of holding or raising the payment.

“Shell paid £11.6bn in dividends in 2019 which accounted for 15.4% of all FTSE 100 payments last year. Therefore its dividend is not only going to hurt its own shareholders but also people who own funds tracking the total return of the FTSE 100 index which includes dividend payments.

“Very weak oil prices have put management in the oil sector in a tricky place and they need to do everything they can to survive the crisis.

“Norway’s Equinor recently set the tone for the oil sector payouts by cutting its dividend. BP said it would continue paying as per normal for now, but Shell’s actions could lead to BP potentially reassessing its position in the near future.”

Reckitt Benckiser

“Reckitt Benckiser has demonstrated that not everyone is suffering equally in the coronavirus crisis. The consumer goods giant lifting outlook guidance feels like a dose of vitamins to a market facing a wave of profit warnings, dividend cuts and fundraisings.

“Reckitt’s slant towards health and hygiene chimes perfectly with the need to look after ourselves and the reality that cleanliness is now less of an aspiration and more of a necessity. It is little surprise to see brands like Dettol, Lysol, Mucinex and Nurofen in demand.

“The business also seems to have passed the supply chain test in the face of exceptional demand that saw a substantial increase in sales in a very short period. The company is also doing its bit in the effort to tackle the pandemic by putting 1% of profit into a support fund, thereby ticking the good corporate citizen box.

“Although sales were lifted by stockpiling as the crisis took hold, it seems likely that some of the changes to consumer behaviour in the wake of the pandemic will be lasting.

“This could provide some extra pep to the recovery plan being delivered by CEO Laxman Narasimhan.

“Narasimhan says he is looking to go from being a ‘good house in a good neighbourhood’ to a ‘great house in a great neighbourhood’ – if he keeps delivering a good performance then he might be able to book the movers.”

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