For BT investors who have seen the company’s share price fall by 70 per cent over the past 18 months there was always the consolation of the dividend income. Not now.
The final dividend has been cut from 10.4p to just 1.1p a share with a warning future payments will be less than half the past level.
The telecommunications company is the latest to take the knife to its dividend this year. Investors in Whitbread and Home Retail, the Argos retailer, should think themselves lucky simply to forgo any increase in their payment.
Shareholders in HSBC, Aviva and Legal & General are among those to see their dividends cut while holders of Old Mutual, ITV, Debenhams plus most banks and building companies are receiving nothing at all.
More UK companies are freezing or axing dividends this year than announcing rises. Many companies are now using their capital without paying for it.
Dividends were once the last thing to go when times got tough. Companies held back profits in good times, typically paying out only 40 per cent of earnings and building up revenue reserves.
However, while companies were once punished by investors for slashing income, now the City often encourages them to cut. Institutions now look at total return.
They fail to differentiate between tangible cash returns and unrealised share prices movements and they equate one-off capital returns through share buy-backs with the quality returns from dividends that are there through thick and thin.
Perhaps managers that got companies into a mess are no longer given time to pull them out and keep shareholders on side by maintaining dividends. Now that chief executives of troubled companies are readily axed, their successors axe shareholder payments to start with a clean sheet.
After all, once the share price has collapsed and thus sent the yield soaring, a company would rather please new investors that support its loyal ones.
And when the workforce is being cut too, as BT’s is, managements find it useful to say shareholders have shared the pain. Certainly, with most banks unable to pay dividends they find it easy to say loan facilities will be renegotiated only if the borrowers’ investors make a sacrifice too.
But when the recession is over, those companies that are gung-ho on cutting payments ought to regret having shattered the unbroken record of paying increasing dividends. And those companies currently raising new capital from existing investors through rights issues should ask why anyone will buy new shares if the old ones pay no income.
Indeed, directors should remember that many investors rely on dividends. With 1.4m small shareholders, British Telecom ought to appreciate that more than other companies. Those people bought BT at its privatisation as an introduction to capitalism: a cut in their regular income is not the reward they expected.
(Pic:uli harder cc2.0)
