Heading into the final quarter of 2020, the outlook for UK dividend investors remains mixed after a turbulent year. Some companies have restarted payouts after freezing them earlier in the year, some have even raised their payouts, while others look set to pay nothing for the remainder of the financial year.
Last month we profiled five companies that have reinstated their dividends, and they include car insurance firm Admiral (ADM) and shipping services firm Clarkson (CKN). But progress towards dividend normality has been slow in other areas: aerospace and defence firm Meggitt (MGGT) will not pay an interim dividend this year after making a loss of £368 million in the first half, while casino operator Rank will not pay a final dividend after profits halved during the lockdown period.
For our monthly round-up of the FTSE’s top dividend payers, there has been a shift in positions among the top 20 as new information feeds through into Morningstar Direct data. The recent sell-off on the FTSE 100, 250 and All-Share in early September has nudged yields at the top end back above 5%.
Early 2020 saw a big spike in yields, in some cases above 10%, as share price crashed, but these have eased back as the global stock market recovery has progressed. At Morningstar we often flag up high yields as a warning sign of trouble to come – for example, Royal Dutch Shell (RDSB), BP (BP.) and WPP (WPP) all had yields of 10% and above before announcing steep dividend cuts, and in WPP’s case preceded a cancellation.
This month, WPP has pushed ahead of GlaxoSmithKline (GSK) in our list of narrow and wide economic moat stocks with a decent yield. The advertising giant has declared an interim dividend this year of 10p, but this is sharply down on the 22.7p paid to investors for the first half of 2019. In March, at the height of the coronavirus market panic, the company cancelled its final dividend of 37.3p and suspended its share buyback programme, as the industry it operates in was badly affected by lockdown measures.
Shares rose after WPP announced the resumption of a dividend, even at a much lower level than last year and as the company revealed a £2.5 billion loss for the lockdown-affected period. Investors had expected the loss to be sizeable, but the reinstatement of the dividend was welcomed as a statement of intent and the share now yields more than 5%.
Morningstar analyst Ali Moghrabi says that WPP, despite recent share price gains on the dividend resumption, is still significantly undervalued at 638p, against a fair value of 1,300p. The outlook for the company is also brighter than it was earlier in the year, he adds: “The first-half results demonstrate that the firm does have the ability to help small and large clients through digital transformation, with a focus on e-commerce, now and in the future.”
Still WPP has one of the lowest dividend cover ratios in our list, at 1.3, which means that the payout is covered by annual earnings with only a small margin to spare. In contrast, London Stock Exchange (LSE), a favourite of fund managers like Nick Train and Ninety One’s Simon Brazier, has one of the lowest yields but one of the highest dividend covers – it could pay its dividend three times out of profits at this point. The company has been on a strong share price run this year and has recovered from £58 at the height of the March crash to above £90 on September 15, a new record high and a jump of 55%.
LSE and WPP are opposite ends of the spectrum for dividend investors – one has produced strong capital growth but low (albeit safe) yield, while WPP shareholders have faced share price weakness this year but are paid a chunky (if riskier) yield of 5% in an era of zero interest rates and near-zero gilt yields.