UK companies including Shell and GlaxoSmithKline will have to cut their dividends, as many payouts are not sustainable considering the drop in earnings, says Henderson Global Investors.
James Henderson and Laura Foll, managers of the Henderson UK Equity Income and Growth fund, say that big names such as Shell and GlaxoSmithKline will cut their dividends, with dividend growth being hard to find.
Foll says: “A few companies realised that 2015 was the year they said ‘OK this is the year we need to cut the dividend’.
“I think 2016 will be reasonably similar. I think we could legitimately see cuts by Glaxo and Shell in the future.
“Last year FTSE 100 earnings were down on average 13 per cent, yet dividends still grew. That is unsustainable and we should question whether those companies should be increasing their dividend.”
Looking to the largest dividend payers in the UK, such as HSBC, Shell, BP and Glaxo, Foll says cuts to those dividends would not be surprising.
She says: “We have valid questions about most of those dividend payers in the UK. Shell is over 10 per cent of the dividends in the UK and when the Shell-BG deal goes through it will be 13 per cent of all UK income. I think it will not come as a surprise if Shell cut its dividend.
While Shell has said it will continue to pay its dividend in “any reasonable oil price environment”, Foll argues that at $30 a barrel, oil prices are not reasonable.
She adds: “I think companies should cut the dividend if it’s the right thing to do for long-term health of the business.”
Looking to GlaxoSmithKline, the current dividend is 80p per share, while the earnings per share is 75p. Foll argues that the company should be investing back into the research and development side of the firm.
Foll says: “Speaking to the Glaxo chairman he described the dividend as a financial straightjacket on the business, and that really shouldn’t be the case, the dividend shouldn’t be leading the strategy of the business.”
Henderson says his preference for the fund, which is currently yielding around 3.5 per cent, is to hunt for income-payers outside of the FTSE 100, where dividend cover is better and dividend growth is higher.