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Woodford warns banks will disappoint on dividends
Neil Woodford becomes latest to warn over bank dividends, as their shares take a pummelling and Barclays faces scrutiny over its payout.
by Daniel Grote on Feb 11, 2016 at 14:00
Star fund manager Neil Woodford has warned investors to prepare for dividend disappointments from the major UK banks, as the sector takes a battering on fears the global economy is heading for recession.
Bank share prices have tumbled since the start of the year, and some have warned that dividends from the embattled sector will come under further pressure.
In a video on Woodford Investment Management's website, Citywire AAA-rated Woodford, a long-standing bear on banks, said the sector, along with mining, industrial companies and oil stocks, looked the most vulnerable to dividend cuts.
'The market's view, for example, [on] Lloyds and Barclays and Royal Bank [of Scotland], was that they would be generating surplus capital and distributing that to shareholders. I think that is not going to happen,' he said.
While emerging markets-focused bank Standard Chartered (STAN) last year scrapped its dividend alongside cuts of 15,000 jobs and a £3.3 billion rights issue in a bid to shore up its embattled business, Barclays (BARC) has now come under scrutiny over its payouts to shareholders.
Jefferies analyst Joseph Dickerson last week warned that the bank could be forced to axe dividend payments in the next two years in order to shore up its balance sheet, given the flat-lining of its tier one capital ratio, a common gauge of a bank's strength.
Barclays paid out 6.5p in 2014 and last year indicated 2015 payments would be frozen at that level. So far three 1p quarterly dividends have been paid, with a final 2015 dividend to be announced in the bank's results next month.
William Meadon, manager of the JPMorgan Claverhouse (JCH ) investment trust, said the bank's yield suggested the market was not pricing in a cut. Despite losing nearly a third of its value since the turn of the year, Barclays yields 4.5%. While that is high, it is not yet the double-digit levels of some of the miners, such as BHP Billiton (BLT), where dividend cuts are a near-certainty.
'The market doesn't think it will [cut], it has a pretty good balance sheet,' he said. Simon Gergel, manager of the Merchants (MRCH ) investment trust, said a cut was unlikely, but did not rule it out.
'With banks you can never say never – issues develop,' he said. 'As of today, it seems unlikely it will scrap the dividend but it is not unconceivable.'
Can Lloyds match hopes?
With Lloyds (LLOY), the question is less one of cuts, but whether the bank can match the market's expectations of dividend rises, having paid out a dividend for the first time since the financial crisis last year.
So far 2014's 0.75p payment has been matched by an interim 0.75p dividend for the 2015 financial year. The most recent estimates from Jefferies point to a 1.75p final payment for 2015, due to be announced in full-year results later this month, taking the year's payment to 2.5p, equating to a 4.4% yield on the current share price.
But it is in the 2016 and 2017 financial years when Lloyds' payments could really become lucrative. Jefferies forecasts of 4.2p for 2016 and 4.7p for 2017 would equate to yields of 7.4% and 8.2% on the current price, suggesting Lloyds could rally from here, or the market doesn't believe it will be able to offer those payouts.
Gergel did not believe the bank's plunging share price would affect management's decision over the dividend, adding that more compensation for payment protection insurance mis-selling was the greatest threat to payouts, especially in the wake of Royal Bank of Scotland's (RBS) ballooning bill, revealed last month. RBS dividends meanwhile seem a long way off given the bank is on course for a ninth consecutive full-year loss.
Matthew Jennings, investment director in fund group Fidelity's UK equities team, was more bullish. 'With Lloyds, you've got a company that has rebuilt its balance sheet,' he said.
'The company is delivering what it expects to in earnings. What does the company do with those profits? Keep putting them on the balance sheet, way above what regulation requires? Dividend policy should be based on long term earnings prospects rather than the short term.'
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- Standard Chartered PLC (STAN.L)
- Barclays PLC (BARC.L)
- Lloyds Banking Group PLC (LLOY.L)
- Royal Bank of Scotland Group PLC (RBS.L)
- BHP Billiton PLC (BLT.L)
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