One of the consequences of the Covid crisis on the stock market this year has been the widespread cancellation of dividend payouts. A natural first move by companies faced with uncertainty is to conserve cash, and dividends are usually first in the firing line - which is exactly what we saw.

The impact of coronavirus in the UK first emerged in Q1, so the impact on dividends wasn’t really known until the half-year. But the writing was on the wall. Reports of dividend cuts and cancellations filled the RNS newswires for weeks during the spring.

By mid-Summer, analysts at Link Asset Services started to put numbers on the problem, and things looked bleak. Three quarters of the companies due to pay dividends in the second quarter either cut or cancelled them altogether. Year on year payouts more than halved (-57.2%) in that time to £16.0 billion.

Unsurprisingly, the latest figures for Q3 tell a similarly sorry tale. Year on year payouts fell by 49% between July and September to £18.0 billion - the worst Q3 performance since 2010, in the aftermath of the financial crisis.

According to Link, £14.5 billion was slashed from the overall total in Q3, and banks accounted for two-fifths of the reduction. Dividends in the sector have been on hold since late March, when the Bank of England stepped in to ensure banks were as well financed as possible as Covid took hold. A review of that policy isn’t expected until Q4.

Elsewhere, oil and mining stocks (with the notable exception of gold shares) were also responsible for much of the fall. On a sector basis, the hardest hit areas of the market have been travel and retail, where payouts fell by 96% on the same period last year.

Signs of optimism

But there is hope on the horizon. Defensive stocks in food retail and consumer staples delivered modest increases in their dividends in Q3. In turn, others have started to reinstate their payouts and in some cases they’re making up previous shortfalls - including shares like BAE Systems and IMI.

It’s conceivable that analysts might now be getting a better steer from management on future dividend payouts and are starting to up their forecasts. So there could be reasons to take note of some of the big upgrades in order to find where the early dividend recoveries might be found.…

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