The Investment Association has said the coronavirus should not be an excuse for companies to rebase or reduce dividends unnecessarily as UK banks cut £7.5bn worth of distributions for shareholders.
The Bank of England had been pressuring banks to cancel dividends as well as cash bonuses for executives amid the current public health crisis and resulting market sell-off. On Tuesday, a number of the UK’s largest lenders relented, including Lloyds, Barclays and HSBC among others.
To date UK plc has cut £15.4bn worth of dividends across sectors, according AJ Bell data. On Tuesday alone, £7.6bn worth of dividends were cut or cancelled.
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IA chief executive Chris Cummings (pictured) said investment managers recognised the need for the wider economy to be supported during the “unprecedented crisis” and also expected companies to follow the guidance of their regulators. He also noted it was prudent in some cases for companies to stop dividends in order to retain “much needed cash for the business”.
But Cummings added that “we should not lose sight of the crucial role of dividends for the wider economy, and the current situation should not be used as an opportunity to rebase or reduce the dividend unnecessarily.
“Shareholders would expect companies to restart them as soon as it is prudent to do so.”
Interactive Investor head of markets Lee Wild said from an investment perspective, the move by banks to cut dividends “removes a core plank of the case for buying bank shares”.
Lloyds Banking had a dividend yield at present of 10.5%, Barclays 9.6%, Royal Bank of Scotland 4.4%, HSBC 9% and Standard Chartered 4.9%, Wild noted. Those will now evaporate.
AJ Bell chief investment officer Kevin Doran said the big question now facing banks was what they are going to do with the £7.5bn.
“Now would be the ideal time to repay the British public for the bailout the banks received during the Financial Crisis by writing of debt repayments for a period of time for those most affected by the Covid-19 crisis,” Doran said.
The £7.5bn would go a long way to providing debt relief to individuals and businesses that will be unable to make interest payments over the next three to six months, he said. “Cancellation of share buybacks and banker bonuses would go even further.”
The UK banking sector currently makes around £28bn per quarter from interest paid on debt, according to the Bank of England. That’s on a total loan balance of around £1.9trn.
The Investment Association emphasised that executive pay should take into account shareholder experience, not just financial performance. Cummings said: “If companies are stopping dividend payments, boards and remuneration committees should be considering how this impacts on executive pay both for the current year and also in relation to the year the dividend was for.”
