Dividend cuts: protecting your returns
PRUDENTIAL has done it. Scottish & Newcastle warns it will do it. And ICI reckons it really has to do it as well. Companies that once strained every sinew to keep their dividends up every year are conceding that their payouts to shareholders may be cut.
Hence the lengthening list of companies - Prudential last week became the latest, most high-profile example - to warn that they are cutting dividends. Cutting may not be cool, but it is no longer calamitous.
Fund managers don't like it, though. Robert Talbot, investment chief for Isis, said: 'Investors start from the position that a company will need a very good reason indeed to cut its dividend. Will the company really use the money better than if it hands it to shareholders?'
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Tim Rees, strategist with Insight Investment, agreed: 'Dividends are a crucial indicator of performance. I would be extremely worried if dividend cuts become fashionable.'
But both concede that tough times mean tough choices. In the past two years, dividend cuts have become more common, and they pose a problem for investors.
In the days when dividends were generally safe, choosing stocks to generate income was easy: look for shares with high yields, sit back and let the money roll in.
And in the current climate with the base rate at 3.5%, high-yielding stocks should be more attractive than ever to income seekers. But with more companies prepared to cut dividends, the old rules no longer apply. Yes, investors need to look at projected dividends, but they must also ask how robust those projections are.
Take a simple example. Prudential paid dividends of 26p last year. Measured against today's share price, 417 3/4p, that represents a tasty yield of more than 6%. But following chief executive Jonathan Bloomer's statement last week warning of a dividend cut, we know that the dividend this year will be about 16p - an unexciting return of less than 4%.
Spirent, the information technology business, is this week expected to say it will not pay an interim dividend after a 30% slump in revenues in the communications division, which makes up 40% of its business. Despite its cash problems, Spirent's share price is up by 200% since March. On Friday it closed at 38p.
