Which dividends look safest from the coronavirus crisis? City analyst runs the rule over 15 that are likely to survive
- City firm usually assesses dividends that look shaky – but is too spoilt for choice
- So it has turned its attention to which dividends look more solid in current crisis
- Canaccord also looks at which sectors are most likely to generate divis now
- Here’s how to help people impacted by Covid-19
Companies struggling to cope in the coronavirus emergency are cutting or ditching their dividends.
But some dividends will survive, and Simon McGarry, senior equity analyst at Canaccord Genuity Wealth Management, narrows down the field and looks at which sectors might be most resilient below.
Shareholder rewards: Which dividends look safest in coronavirus crisis?
We often carry out ‘shaky dividend’ research on companies where shareholder rewards look most in danger.
But dividends are currently in freefall and we think, in the worst case scenario, up to 50 per cent of the UK’s dividend income might disappear in the first half of 2020.
Clearly, at the moment, we are spoilt for choice and what is much rarer are companies where the dividend looks more solid.
Against this bleak backdrop, we thought it would be useful for investors if we carried out ‘strong dividend’ research to look at stocks that might have the most reliable payouts.
Obviously, there is no such thing as a sure thing in the world of investment and many of these stocks – because of their position – are expensive.
| Stocks | Industry | Market capitalisation (m) | P/E | Dividend yield | Dividend cover (P&L) | Gearing: debt/cap emp’d | Price absolute – 3 mths |
|---|---|---|---|---|---|---|---|
| – | – | Current | +12m | +12m | +12m | FY-1 | Current |
| BAT | Tobacco | 67,208 | 8.5 | 7.6% | 1.6 | 40% | -12% |
| BHP Group (LSE) | Metals and Mining | 62,756 | 8.4 | 8.3% | 1.4 | 15% | -31% |
| BP | Oil Gas and Consumable Fuels | 67,788 | 21.1 | 9.4% | 0.5 | 35% | -32% |
| GlaxoSmithKline | Pharmaceuticals | 74,130 | 12.9 | 5.4% | 1.4 | 58% | -17% |
| IG Group Holdings | Capital Markets | 2,455 | 14.5 | 6.5% | 1.1 | 0% | -5% |
| Imperial Brands | Tobacco | 14,665 | 5.9 | 12.3% | 1.4 | 67% | -19% |
| Plus500 | Diversified Financial Services | 1,190 | 9.1 | 4.4% | 2.5 | 0% | 30% |
| Rio Tinto Group (LSE) | Metals and Mining | 60,560 | 9.5 | 6.8% | 1.7 | 7% | -17% |
| Royal Dutch | Oil Gas and Consumable Fuels | 111,611 | 17.2 | 10.5% | 0.5 | 29% | -36% |
| Sainsbury (J) | Food and Staples Retailing | 4,718 | 11 | 5.1% | 1.9 | 14% | -7% |
| Schroders | Capital Markets | 6,365 | 13.3 | 4.9% | 1.6 | 0% | -30% |
| Softcat | IT Services | 1,864 | 25 | 3.2% | 1.3 | 0% | -21% |
| Standard Life Aberdeen | Capital Markets | 4,318 | 12.8 | 10.8% | 0.8 | 0% | -42% |
| Tesco | Food and Staples Retailing | 21,798 | 12.5 | 4.1% | 1.9 | 20% | -12% |
| Unilever Group (LSE) | Personal Products | 105,489 | 17.2 | 3.8% | 1.5 | 62% | -7% |
| Source: Canaccord Genuity Wealth Management. Find an explanation of the terms used in this table below. | |||||||
Also, despite many sectors getting ‘hit for six’ there are those that are proving to be more resilient.
Mining: The price of some commodities has declined whilst others have held up.
Iron is currently US$84 a ton and Rio Tinto is yielding 6.4 per cent and BHP 6.6 per cent.
Tobacco: Companies such as BAT, yielding 7.5 per cent, and Imperial, yielding 12.2 per cent, are very cash generative and they tend to be more reliable where paying dividends are concerned.
The sector hasn’t seen much of a decline in demand since the lockdown – people might even be smoking more if they’re at home as opposed to being in an office where they can’t.
This might be a contributory factor to the resilience of the sector.
Food retailers: Given that supermarket earnings have gone through the roof since the lockdown was first hinted at and UK consumers went into blitz mode, eager to stock their cupboards, food retailers like Tesco and Sainsbury’s should be fine.
It’s a sector to keep an eye on though because if the lockdown does have an impact on the supply chain, there might be problems down the road.
It is also costing supermarkets a lot more to feed the nation, but the 12-month business rates holiday which saves them £585million should mitigate some of this.
Oil: Companies in this sector contributed around 20 per cent of UK dividend income in 2019.
Although they can probably maintain dividend payments throughout 2020, the price war between Russia and Saudi Arabia could cause problems down the line.
If oil gets back to $50 a barrel then companies like BP and Royal Dutch Shell should be able to maintain their dividends. If it doesn’t, then investors need to reassess their position.
Simon McGarry: ‘In the worst case scenario, up to 50 per cent of the UK’s dividend income might disappear in the first half of 2020’
Interestingly, Norway’s Equinor has just cut its dividend.
Asset managers: Whereas the banks have postponed their dividends, we expect asset managers like Schroders and Aberdeen Standard Life to maintain their payments.
Schroders has a strong balance sheet and excess capital that puts the company in a good position. It has a yield of 4.4 per cent.
Aberdeen Standard Life is selling its life insurance business in India and the proceeds should be going to shareholders. The company has a yield of 9.8 per cent.
Who knows how the next few months will play out. Investors must use their smarts, keep their wits about them and stay informed.
The outlook for dividend income is grave at the moment, but at some stage we will start to see light at the end of the tunnel and it’s possible dividend payments which are cut now will be reinstated.