Lloyds, BP and Vodafone:
What now for these
dividend-paying favourites?

Published: 7 June 2019

One theme always stands out when we review the top selling shares on the Alliance Trust Savings platform – the enduring demand for income.

Over the past few years, some of the most popular have tended to be those with a reputation as reliable and regular dividend payers. Prominent ‘blue chip’ businesses such as BP, Royal Dutch Shell, GlaxoSmithKline, Vodafone and Lloyds Banking Group.

But while these perennial favourites may have proven themselves a reliable source of income of late, all investors know that past performance is not necessarily indicative of future results.

UK dividends hit a record £99.8bn last year, according to Link Asset Services1, yet there is a degree of pressure on dividends. Political and economic uncertainty continues to stand in the wings of markets waiting for its next cue to disrupt, while The Pensions Regulator has told firms to give priority to funding pension schemes above shareholder dividends2.

There are also challenges particular to the sectors in which the big dividend payers operate. So, here we take a quick look at the state of play for three of our Top 20 share sellers.

Remember, investments can go down as well as up and you may get back less than you put in. Here we’re reporting the facts as we understand them, so you can follow-up with more detailed research of your own if you wish. We can’t give you investment advice.

Lloyds Banking Group

Following a six-year hiatus in the wake of the financial crisis, when it was taken into state ownership3, Lloyds returned to the dividend register in 2015. It’s now paying out more than it was prior to the downturn. And banks on the whole currently account for some 12% of UK dividends, up from 7% immediately following the crisis4.

Unlike dividend favourites that derive significant chunks of their earnings from overseas operations and so have benefited from the weakness of the pound since the EU referendum, Lloyds depends very much on the health of the UK domestic economy5. Arguably, that makes it vulnerable to any UK downturn and the effects of Brexit, particularly the turbulence that might be expected to result from a potential ‘no deal’ exit.

On the plus side, however, its latest results showed that it had managed to reduce costs while still investing significantly in digitising the business6. It has also seen the cost of repaying payment protection insurance (PPI) charges fall, ahead of the August 2019 deadline by which new claims must be filed. In addition, the bank announced in May that from 2020 it would pay dividends quarterly, rather than twice a year7.

Expectations of future earnings growth have helped the bank’s share price perform strongly in recent months, and the 6% dividend yield will likely appeal to income investors8. But whether you think that’s sustainable or not may depend on your view of the UK economy and how Brexit plays out.

BP

Oil price turbulence might have pointed to tough times for the energy giants, but factors including higher production and greater efficiency helped BP report better than expected profits in 20189, when it also raised its dividend for the first time in four years.

Its dividend yield - a ratio of the annual dividend compared to the share price - is currently 5.84%10. In contrast to Lloyds, BP has a global reach that ensures a large chunk of its earnings are derived from overseas operations. This means it is among the many FTSE 100 constituents to have benefited from the weakness of the pound since June 2016, and which could continue to do so if economic difficulties in the UK drive the value of sterling down further.

For those with an eye to longer-term dividend sustainability, the main concern is likely to be the volatility of the oil price. This can have a big impact on profitability and therefore dividend yield, although BP has recently reduced its oil price exposure to a degree by acquiring US shale assets from BHP11.

Vodafone

With a dividend yield of 9.6% it’s no wonder that Vodafone is popular among income investors. It’s estimated that the telecoms giants has accounted for around £1 in every £14 in dividends paid out by listed companies over the past decade.12

But with low dividend cover13 and a steep share price drop in the first quarter of 2019, investors were braced for a dividend cut.

That eventually transpired in May, when it announced its first dividend reduction since it began distributing payouts in 1990. The full-year dividend was cut by 40 per cent, with the company citing the cost of building a superfast 5G network.14.

Nick Read, chief executive of Vodafone, said the decision hadn’t been taken lightly, but suggested that it “secures the dividend going forward”.15

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Facts and figures

A company’s dividend cover can be a useful measure for income investors to understand. It’s the ratio of profits to dividends, a multiple that shows the extent to which a company’s earnings exceed its dividends (and so potentially suggest they can continue paying them). As a general rules investors typically seek dividend cover of around 2x dividends, and below 1x dividend suggests a company that will struggle to produce a payout from its current earnings.

Important information

This is provided for general information only and takes no account of personal circumstances. It is not a recommendation to buy or sell. It is provided solely to support you in making your own investment decisions. If you have any doubts as to their suitability you should seek expert advice. Alliance Trust Savings does not give financial or investment advice.

Laws and tax rules may change in the future without notice.

Please be aware that the value of investments can fall as well as rise so you could get back less than you invest. Past performance is not a guide to future performance.


1 Link Asset Services - UK dividends break new record, even as yield soars to post-crash high
2 FT - Pensions Regulator tells weak companies to stop paying dividends - 5 March 2019
3 FT - Lloyds to pay first dividend in 6 years - 27 February 2015
4 Citywire - Lloyds leaps as dividend rise overshadows profits miss - 20 February 2019
5 Guardian - UK-focused firms have struggled since Brexit vote, analysis finds - 25 June 2018
6 IG - Lloyds share price: five things we learnt from 2018 results - 25 February 2019
7 Sharecast - Lloyds delivers bumper payout as PPI charges fall - 20 February 2019
8 Investomania - Is the Lloyds Banking Group PLC share price on its way to reaching 75p? - 26 February 2019
9 FT - BP more than doubles profits for 2018 as output soars - 5 Feb 2019
10 Macrotrends - BP 30 year dividend yield history - 25 March 2019
11 Reuters - BP launches $3 billion sale of U.S. onshore assets to fund BHP deal - 19 Dec 2018
12 Sky News - Vodafone dials in dividend despite cut pressure - 13 Nov 2018
13 Shares magazine - Vodafone Group (VOD) - 26 March 2019
14 FT – Vodafone slashes dividend 40% to bolster balance sheet – 14 May 2019
15 Evening Standard - Red alert for blue-chip dividends as Vodafone slashes £4bn payout – 14 May 2019

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