Why UK firms have continued with dividend cutting spree - James Rowbury

During the first two days of the week, UK stocks saw significant gains as Italy and Spain – two of the worst hit EU countries – showed signs of improvement in infection cases and deaths. The UK, however, continues its lagged trajectory, as the death toll continued to rise, surpassing 7,000.

News of Boris Johnson’s admission to intensive care earlier this week gave way to a brief stint of Sterling weakness, which later began to stabilise as clarity emerged around the severity of his condition. All in all, Sterling has been up 0.64% against the US Dollar and 0.27% higher against the Euro over the past week.

At the time of writing, expectations of eased lockdown restriction begin to fade, as the UK braces itself for an extended period of at least three weeks. Though much expected, the paralysed UK economy now faces another daunting period of inactivity.

For now, markets remain stable owing to an extended credit line of cheap debt and asset purchases from the Bank of England. The CBOE UK100 has advanced 4.65% since the beginning of the week.

UK companies have continued their dividend cutting spree, retracting their guidance as they look to preserve cash during the shutdown in activity. More buoyant investor sentiment has been created by the green shoots appearing from nations in the exit period of lockdowns.

Reported Chinese manufacturing activity has picked up somewhat –a consequence of eased restrictions.

The epicentre of the virus, Wuhan City, has now re-opened, giving hope to those in search of evidence that there is an end to the spread of the virus.

Stocks worldwide have also been on the rise, as some countries showed signs of improvement while others announced measures to combat the pandemic.

Global coronavirus infection cases have already surpassed 1.48million and deaths 88,500.

Austria, Denmark, and the Czech Republic are the first countries in Europe to announce the loosening of measures and lockdowns.

Denmark has announced the reopening of kindergartens and schools on 15th April while the Czech Republic and Austria said that some non-essential shops will be allowed to open over the coming week.

The quick initial responses from these countries – school shutdowns, restrictions to public life and bans on mass gatherings – helped to halt the spread of the virus and to protect their healthcare systems from getting overstretched.

Countries around the globe will be following further developments closely as they may set trends. Japan’s Prime Minister, Shinzo Abe, has declared a state of emergency, as infections surpassed 4,000 and announced a US$357bn stimulus package, which is worth 7% of Japan’s GDP.

This declaration will give the power to seven prefectures to request non-compulsory business closures, such as gyms, cinemas, museums, and escalate social distancing. Over the past week, the US S&P500 has gained 10.48%, Hong Kong’s Hang Seng grew by 3.36% and Japan’s Nikkei 225 has surged 8.39% in response to the news.

Turning our views locally, Bradford-headquartered supermarket chain Morrisons has seen a surge in demand recently, as people have been panic buying. Mid-March, the company posted its 2019 results, which showed sales had increased by 4.8% and pre-tax profit risen 3% year-on-year.

However, the board decided to take caution and suspend dividend payments to improve its liquidity and cash position during times of uncertainty.

While most may think that the pandemic has been hugely beneficial to supermarkets, rival Tesco has revealed that increased health and safety requirements for staff, security costs and reduced permitted footfall has led to much larger fixed costs, with analysts predicting that profits might be weighed down by up to 15% for the year.

Please note that investments and income arising from them can fall as well as rise in value and you may lose some or all the amount you have invested. Past performance and forecasts are not reliable indicators of future results or performance. Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the companies mentioned.

James Rowbury, Investment Research Coordinator at Redmayne Bentley

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