Short-term volatility is worth rewarding in the long term
Simon Young of AXA Investment Managers
For any UK investor reviewing 2020 and the declines seen in the FTSE All Share, and in particular the dividend cuts, attention naturally turns to the dividend outlook here and the lessons we may have learned.
A starting point is the recent past to get clues as to what the future may hold. In the aftermath of the 2008-09 Global Financial Crisis (GFC), dividends paid by FTSE All-Share constituents fell 21% from a high in August 2008 to a low in October 2009.
The good news is that from the lows, the All Share Index dividends rebounded 60% over the next five years and surpassed their 2008 high just four years later, in early 2012.
Delivering a Stabilizing Impact: Dividends Still Count, Even After the Pandemic Blues
Fast forward to today and the dividend yield of the FTSE All-Share stood at 2.9% at the end of March, after falling just under 35% from the ‘last year.
However, we see grounds for optimism based on the history and success of the vaccine rollout in the UK. We believe dividends will rebound vigorously in the years to come, and our optimism is broad.
The road back to good health
First, the dramatic progress in the vaccination program – over 60% of the UK population has received a first dose and 14% a second dose – means that economic activity and corporate cash flow is already starting to recover quickly.
Unlike the post-GFC period, household balance sheets are now in a much better financial position. Consumer savings rates have been boosted by forced lockdowns and these savings represent a pent-up spending boost that will benefit the economy. At the same time, corporate profitability has already started to decline.
This good news is offset by the potential for rising unemployment as the UK’s leave program ends in September, while higher corporate taxes will absorb businesses’ free cash flow. However, these negative factors are unlikely to derail the overall recovery in corporate earnings.
Importantly, UK corporate boards understand shareholder demand for dividends (and the role they play in composing returns), especially with interest rates on savings products. at negligible levels.
Especially for investors, many of the companies that have cut dividends have publicly declared their desire to resume dividend growth as soon as earnings, cash flow and debt permit.
Brexit is yesterday’s news: UK stocks are the city’s talking point with a lot of value and opportunity
Like other managers, we have made a few changes to the fund in recent months, taking advantage of declining stock prices to buy cash-generating companies with, we believe, excellent futures.
We added stakes in take-out food retailer Greggs, Compass Group (the world’s leading foodservice) and the UK’s largest direct-to-consumer investment platform, Hargreaves Lansdown.
We believe all three have distinct barriers to entry, whether it’s its low price Greggs which offers great value, the international scale and specialization of Compass Group, or the the Hargreaves Lansdown brand, trusted by over 1.5 million customers.
Eagle eyes will notice that only Hargreaves Lansdown is currently paying dividends. The other two have been hit by lockdowns limiting travel and return to offices, hitting incomes and forcing them to suspend dividends.
However, when analyzing businesses, our main goal is to understand a business and its long-term competitive advantages.