A DS Smith plant on Nantes, France. The company has reinstated its dividend, with a mid-year payout due in May © Stephane Mahe/Reuters

Miles Roberts, chief executive of FTSE 100 packaging group DS Smith, admits he put his investors “in real difficulty” in July when the pandemic convinced him to cancel the company’s annual dividend.

DS Smith made a £368m pre-tax profit for its 2020 financial year, but paying out £200m-plus of that, as investors expected, “didn’t seem appropriate” given the difficulty of predicting the path of the pandemic, Mr Roberts added. The company had already announced in April that it would hold off paying its interim dividend.

Following November’s coronavirus vaccine breakthroughs, DS Smith has reinstated its dividend, with a mid-year payout due in May. That was one of many similar boardroom moves across Europe and the US over the past month, signalling the end of a sudden drought in payouts. Adjusting for currency movements and other one-offs, global dividends fell 18 per cent year-on-year in the second quarter, and 14 per cent in the third, according to Janus Henderson.

Professional investors and analysts do not expect payouts to snap back quickly to 2019 levels. Management teams are cautious about the effects of the pandemic, they say, while businesses that received state support during the crisis remain under pressure not to reward shareholders too quickly.

Kasper Elmgreen, head of equities at Amundi, said investors “need to be careful about forecasting a straight line of recovery” into 2021. “Companies will remain prudent because demand for their goods and services will not recover uniformly and the range of outcomes across sectors will be quite wide,” he added.

“There were a lot of companies that cut or suspended [their] dividend without needing to do so,” said Ilga Haubelt, who oversees more than £11bn of equity funds at Newton Investment Management.

Bar chart of % change between 2019 and 2020 payouts showing Banks and leisure companies worst hit in Europe's dividend drought

“But while many management teams seem willing to getting back to 2019 levels as soon as possible, we are often reading between the lines and some whose revenues collapsed this year are unable to commit.” 

The cuts did not fall equally. In the eurozone, banks have slashed dividends by 95 per cent in 2020, according to Amundi, following orders, or strong pressure, from regulators to conserve capital. The region’s coronavirus-hit travel and leisure businesses have cut them by 87 per cent, while healthcare companies’ dividends have dipped by just 0.8 per cent.

The UK has been particularly affected, thanks to the heavy presence on its stock markets of traditional income stocks such as banking and oil companies, which means its payout ratio typically outstrips Europe and the US. Bigger UK companies have handed back 55 per cent of their profits, on average, since 1969, according to fund manager Schroders.

Regulatory pressure and longer-term challenges for sectors such as banking and energy mean London’s dividends are also expected to recover more slowly. The UK banking regulator has given lenders permission to restart payouts, nine months after banning dividends, but returns to shareholders will be capped at 25 per cent of cumulative profits over the past two years.

British oil majors BP and Royal Dutch Shell, meanwhile, are dealing with persistently low oil prices and are under intense pressure from investors to speed up investments into renewable energy. “Generally speaking, this sector is just structurally challenged,” Newton’s Ms Haubalt said.

Dividends per share from companies listed on the MSCI UK index will still be 27 per cent lower next year than in 2019, according to a Schroders-collated average of analyst forecasts.

The European Central Bank on Tuesday announced that the euro area’s banks should be able to reinstate dividends, but asked them to limit the payouts until September 2021 using “extreme moderation.”

The sector has received indirect state support during the crisis from furlough and business loan schemes that prevented swaths of their customers from becoming insolvent. “Policymakers have given banks this lifeboat to stay afloat,” said Citi banks analyst Ronit Ghose. The ECB’s message, he added, was “that you cannot have a party on a lifeboat.”

Across the eurozone, the analyst consensus is for payouts next year to be 3 per cent below 2019 levels. By 2022, they are expected to be 7 per cent higher.

The rise of ethical investing is seen as a hurdle to ratcheting payouts back up. “It is not responsible to signal you will pay monster dividends when you have just laid off thousands of workers or received a state bailout,” said Amundi’s Mr Elmgreen.

US companies have made the smallest degree of dividend cuts or cancellations throughout the coronavirus crisis, according to Jason Borbora Sheen, multi-asset portfolio manager at Ninety One. By the end of November, 72 per cent of businesses listed on the blue-chip S&P 500 index either maintained or raised their payout, he calculates.

DS Smith expects to pay a 2021 dividend that is “a bit lower than in 2019,” Mr Roberts said. He also cautioned that a stock market rally powered by optimism about vaccines may not reflect how management teams in economically sensitive businesses feel about the near future.

“We are going into lockdowns across Europe, we are far from out of it,” he said.

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