Dividends back for the banks and Rolls-Royce sputters as cash outflows mount

“A no-deal Brexit is starting to be factored in by the markets after Boris Johnson warned the country to prepare for such an outcome with sterling coming under renewed pressure,” says AJ Bell Investment Director Russ Mould.

“It remains hard to determine how much of this is the usual brinkmanship around negotiations – EU agreements often go right to the wire after all.

“Ultimately we’ll only really know for sure when both sides stop negotiating – with some apparent wiggle room over the latest ‘deadline’ set for Sunday.

“The fall in the pound isn’t lifting the FTSE 100 for once. That decline in index is down to mixed trading in Asia and weakness across Europe. For all the focus on Brexit, covid hasn’t gone anywhere either and there has been some slightly less positive news on vaccines of late.”

Green light for banks to restart dividends

“On the face of it, banks being able to restart dividends is good news, particularly as so many people in this country own shares in the likes of Lloyds as a key source of income. Unfortunately, the devil is in the detail and this isn’t a simple restart story.

“There are lots of conditions to navigate and the upshot is that investors are not going to get a smooth stream of payments from the sector next year.

“Prior to the announcement, FTSE 100 banks were forecast to pay £2.4 billion in dividends for the 2020 financial year and £7.8 billion for 2021. They paid £13.1 billion in 2018 and £13.3 billion in 2007 at the peak.

“Banks were expected to account for 11% of total FTSE 100 dividends in 2021, significantly less than the 29% in 2007 before the global financial crisis.

“Again, prior to the PRA announcement, total FTSE dividends in 2020 were expected to be down 20% to £59.9bn, then rebound 18% to £70.8bn in 2021. Banks were forecast to provide £7.8bn of that £10.9bn increase in 2021, so you can understand why the sector is so important from a dividend perspective.

“Based on estimates before the PRA announcement, the yield on the banking sector was 1.3% for 2020 and 4.4% for 2021.

“It now looks like the 2020 payments could potentially be more generous than the market expected as some analysts hadn’t forecast anything at all for the fourth quarter period, but there are uncertainties over forecasts for 2021. Banks have been told they can only accrue dividends next year rather than pay them, at least until the PRA updates the market ahead of the sector’s half-year results.

“Those numbers tend to come out between late July and early August, so investors accustomed to receiving dividends from the sector will have to wait until next summer before they get some clarity over the timing and quantity of this important source of cash.

“While this is frustrating for investors, one can understand the ongoing caution from the regulator. It doesn’t want to risk banks getting into trouble if there is a wave of bad debts should there be setbacks to economic recovery, so it is prudent for them to have lots of capital to cope with any shocks as well as being able deploy capital if the economy needs more support.”

Rolls-Royce

“Historically Rolls-Royce has been shorthand for a smooth well-oiled machine – that association looks increasingly at odds with the current sputtering iteration of the group.

“Even before the pandemic CEO Warren East had been focusing his repair job, launched in the mid-2010s after a string of profit warnings, on addressing cash flow issues within the business.

“Any progress has flown out of the window as its business making, fitting and servicing aircraft engines has all but disappeared overnight thanks to the impact on the aviation sector of covid and its accompanying restrictions.

“Now cash is flowing out at an alarming rate with the second wave meaning the situation is markedly worse than it thought in August.

“The company is ahead of schedule with its restructuring efforts and is still flagging a return to positive cash flow in the second half of 2021, however there has to be a chance it will be forced to revisit this view too.

“The recovery of the travel industry from covid is arguably more uncertain than other sectors. There could be considerable divergence in the roll-out of any vaccine and the ongoing handling of infections.

“This could mean travel limits are in place even after individual countries have largely reopened their economies.

“The market’s willingness to wait for an eventual recovery may be tested if it keeps moving further away, with the ultimate risk the company might need another fix for its balance sheet."

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