The stock market may have bounced off its lockdown lows but investors are still feeling the dividend pain from the coronavirus crash.
BP become the latest big name to slash its payout this week, as the energy giant halved its prized dividend in the wake of the battering it took as the oil price collapsed.
But while the hurt will linger from the UK stock market’s income-paying companies cutting 57 per cent off total dividends, for investors it’s often better to look to the future rather than the past.
And with much of the dividend bad news now baked into prices, this means hunting for shares where payouts may be reinstated or lifted.
It may feel too soon to talk about dividend recovery while firms such as BP are still cutting, but analysts say there are firms that could lift rewards for investors
While the return of the same payouts seen in recent years is unlikely for many in the near future, companies that bring back dividends or boost them from their crisis levels are likely to be in demand and see share prices rise too.
To that end, Simon McGarry, a senior equity analyst at Canaccord Genuity Wealth Management, has begun compiling a Dividend Recovery Zone list, featuring firms that its screening shows have the firepower to deliver a pleasant surprise to investors.
He says that following a year that has seen dividends decimated to a far greater extent than even after the financial crisis – when two-fifths of companies cut or cancelled payouts, compared to three-quarters this year – income boosters will be welcomed.
A further leg-up could be provided to shares from UK income fund managers, who have been left fishing in a far smaller pool of companies due to the cuts.
He said: ‘To be clear, while we don’t expect an immediate recovery in dividends to anywhere near 2019 levels we do see scope for some of the companies that cut their dividend in recent months to reinstate them in the later part of this year, albeit potentially rebased at a lower level.
‘For the companies fortunate to be able to do this, we expect the share prices to react positively given the dearth of reliable UK dividend income currently on offer coupled with the number of income investment managers that became forced sellers once the dividends were cut.’
|12-month forward||Dividend per share|
|Source: Canaccord Genuity Wealth Management August 2020|
Interestingly, among the 13 companies that featured on the Dividend Recovery Zone screen, a pair of them – Rotork and Spectris – reinstated theirs after it was run last week.
Names on the list that investors may recognise include a quartet benefitting from the stronger-than-expected housing market, property listing giant Rightmove, homeware seller Dunelm, kitchen and interiors specialist Howdens, and builder Persimmon.
As ever, it is vital to do your own research before investing and remember that such a screen is just one method of identifying shares.
It’s also noteworthy that while some of these companies are cheaper in share price terms than they were a year ago, others are more expensive.
Some may not have paid out much of a dividend in the first place, a situation that occurs with some of the dividend hero investment trusts that have the longest record of raising payouts.
Rightmove, for example, trades on a bumper forward price-to-earnings ratio of 38.4, according to Canaccord’s data, and while its share price is down 18 per cent on its mid-February peak, it is up 43 per cent on its March low and 14 per cent on a year ago.
It is also worth remembering that whatever your view on coronavirus and lockdowns, we remain in crisis territory with fears of a second wave of the pandemic.
And at least some of the stock market’s big jump since late March – particularly in the US – has the feel of investors and traders getting ahead of themselves.
Nonetheless, looking for the firms that have the combination of financial robustness and brighter prospects that enable them to bring back dividends could be one strategy that pays off over the year ahead for those brave enough to invest.