Dawn breaking in Hong Kong, where Prudential is to focus its business.
For income investors, it was less the news that Prudential
The British insurer said it plans to free up capital to invest in its flagship Asia business in a move that will effectively cut its shareholder distribution by 57% this year.
It is disappointing for yield-hungry investors short-term, but Prudential has at least committed to continuing paying dividends despite its refocus on growth markets.
In what has already been the worst year on record for dividend investing, the pickings remain slim. But analysts feel the tide is now turning and are starting to tentatively pencil in more companies returning to the dividend register in the third and fourth quarters.
Although last week began with BP halving its dividend in a widely anticipated move, it ended with insurer Aviva becoming the latest FTSE 100 company to say it will reinstate in the third quarter. Standard Life Aberdeen also maintained its shareholder payout, while Rightmove said it will recommence “when prudent”.
“After the carnage of March and April, the going has got a little easier for those investors who have been seeking income from U.K. equities,” said Russ Mould, investment director at wealth manager AJ Bell.
“The amount of dividends retained and paid exceeded the total of cuts, deferrals, cancellations or suspensions for the second month in a row in July and are currently on course to do so again in August, despite BP’s cut.”
That had made BP the 52nd FTSE 100 company to reduce or suspend its dividend since the coronavirus took hold in March. It contributed to a record 57.2% plunge in underlying dividends –excluding special dividends- to $16.4 billion in the second quarter.
Around half of this fall was due to the U.K. regulator’s blocking of bank distributions. But diminishing payouts from oil companies, and the majority of retailers, industrials, and housebuilders canceling dividends left investors increasingly reliant on a narrower list of stocks for income.
Mould said the housebuilders are prime candidates to reinstate. Buoyed by a resurgent residential property market, the sector “has the financial wherewithal to pay dividends” and he highlights Taylor Wimpey and Persimmon in the sector.
Persimmon has been benefiting from a range of government initiatives to bolster the residential ... [+]
Simon McGarry, senior equity analyst at Canaccord Genuity Wealth Management, tips Persimmon to be one of the earliest housebuilders to reinstate its dividend. Although its revenue fell by a third in the first half of the year as Covid-19 halted construction and sales, it has a “bomb-proof” balance sheet with £830 million ($1.1 billion) of cash reserves.
“Persimmon also relied on self-help rather than government hand-outs during the downturn. This put it ahead of competitors as the company was able to mobilize quickly when construction was given the green light to start again in lockdown,” McGarry said.
It announced forward sales in June were 15% ahead of last year, reflecting this. Persimmon is also well-positioned to benefit from the government’s stamp duty cut on properties of up to £500,000 in value, with its houses selling for around £220,000 on average.
Rightmove is another company benefiting from the tailwind of the resurgent property. With a market share of around 80% and underlying profit margin of 75%, its dominance has enabled it to consistently increase the prices it charges estate agents.
“The company said on Friday that it would reinstate its dividend when it’s prudent to do so. In all honesty, the company is in a position to pay its dividend in Q3. It has a solid balance sheet whether it’s in Q3 or Q4 (if they’re being particularly prudent) then it should almost definitely come back this year,” McGarry said.
Other names in the frame
Property developer Land Securities last month said it will reinstate its dividend in November and many investors will be closely monitoring its rival British Land to see when it follows suit.
Not all companies cut their dividends for purely financial reasons, however, Mould points out. He flagged supermarket retailer Sainsbury and distribution business Bunzl as cases in point.
Sainsbury reported a 10.5% year-on-year rise in grocery sales for the 16 weeks to 27 June, while Bunzl has predicted a 6% revenue rise in the first half of 2020.
“Sainsbury may have canceled its final dividend last year as much for social and optical reasons as financial ones, as it did not wish to be seen to be profiteering from the lockdown but a case could be made for a return to paying dividends, albeit modest ones,” he said.
“The same could be said of Bunzl for the same reasons.”
Alternatively, investors could opt to hunt for income among mid-caps. Electronic instrument manufacturer Spectris and industrial firm Rotork both announced last week they will recommence distributions.
McGarry also believes Howden Joinery, Softcat, Oxford Instruments, and Dunelm in the FTSE 250 are “well-placed” to reinstate, “provided the sequential improvement to their end markets that they have been witnessing continues into the third quarter”.
