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Dividends are back

While the hoi-polloi is getting restless – mixing rising anger with incredulity at the government’s innumerate use of statistics – the aristocrats are becoming uppity, too. Having the sans-culottes on the streets is one thing; having the nobs join them would be a whole new rumble.

The aristocrats in question are the bosses of UK plc. Back in the spring they couldn’t wait to demonstrate their empathy with furloughed staff and struggling consumers by axing company dividends almost as a matter of course. No matter that their virtue signalling hurt shareholders more than it hurt them, it was the right-on thing to do.

Now, like the folk they employ and the consumers somewhere in the chain of the goods or services their companies supply, bosses are harrumphing that, wherever possible, something like normality must be restored. Thus dividends are back, no matter that it will anger the enraged classes.

Most controversial is the decision by Simon Roberts, the new boss at J Sainsbury (SBRY), not just to pay a half-year dividend for 2020-21, but to restore the final dividend for 2019-20, which was axed in April. The grocer’s boss says the dividend payments owe much to the group’s strong trading. With like-for-like sales almost 7 per cent higher than a year earlier, that’s hardly in doubt. Yet mindful that supermarkets are one of the few consumer-facing beneficiaries of Covid-19’s ill wind, Sainsbury’s chiefs also strive to conflate the £240m cost of the dividends with £290m spent on shielding staff and customers from the virus and the fortunate receipt of £230m in business-rates relief.

Over at auto parts maker TI Fluid Systems (TIFS) there is no such luxury. Worse, the group has received furlough cash from the UK government, a complication that meant its bosses’ intention to pay a final dividend for 2019 was beaten back by anger and the intervention of the 54 per cent shareholder, Bain Capital. No matter, TI Fluid’s bosses now promise both to repay any UK furlough payments received and to recommend a final dividend for 2020 next March. Here’s betting that one won’t be beaten back.

Also slipping quietly into Bearbull’s radar was the decision by plumbing-supplies distributor Ferguson (FERG) both to declare a final for 2019-20 with its results and to restore the half-year payout, which it had scrapped. In effect, therefore, its shareholders have escaped a dividend cut. More bravely perhaps, foundry-consumables supplier Vesuvius (VSVS) has back-tracked on its decision to axe its half-year dividend for 2020 and will now make a payment at half 2019’s rate. Other companies may well have followed suit.

Perhaps it is only natural that as the consensus for accepting – even favouring – tough lockdown measures frays, then company bosses should reflect that trend. However, to justify resumption of distributions at levels of dividend cover as slim as generally prevailed pre-pandemic would require reversion to arguments that seem like shibboleths from lost times.

One such would be Benjamin Graham’s dictum from Security Analysis, the 1934 book on which company analysis is based: “The prime purpose of a business corporation is to pay dividends to its owners.” It’s not just that the language sounds as dated as the dialogue from Mrs Dale’s Diary, the sentiment is, too. Today, almost no one dares to say that a company’s “prime purpose” is distributing dosh to its shareholders, even if an argument could be contrived that – after stripping away the layers – then, actually, it is.

Meanwhile, those bosses wanting to take the aggressive tack might use the famous essay by Milton Friedman from 1970 whose title says it all: The Social Responsibility of Business is to Increase its Profits. The essay is remarkably topical since the great economist is having a go at political correctness. Deeper than that, he believes that bosses who talk of the social conscience of business and related matters are “unwitting puppets of the intellectual forces that have been undermining the basis of free society these past decades”. Maybe. Or maybe they just knew on which side their bread was buttered; or that they were better than Friedman at knowing which way the wind was blowing.

True, there is nothing in Friedman’s title specifically about paying dividends. But the tenor of his argument is that that the executive suite should strike a pose that it is the white-collar equivalent of blue-collar rage: “We’re paying dividends and you better like it, punk, ” or words to that effect.

Somehow, I can’t see the boys and girls who run UK plc behaving like that. In which case, investors might want to adapt the words of Bruce Springsteen’s take on the loss of American blue-collar jobs: “Those dividends have gone and they ain’t coming back.”

In practice, that requires new ways to assess a company’s dividend-paying ability. I have suggested how a couple of times (most recently, Bearbull, 7 August 2020). Essentially, the yardstick is that a sustainable dividend can consume no more than half the average free cash, weighted by time, that a company has generated over its most recent five years. Obviously, there also needs be an assessment that a company’s future seems able to support that. Simultaneously, expectations must be lowered. Where once 5 per cent-plus seemed an attainable yield for an income fund, now perhaps 3.5 per cent would be the mark. Otherwise, income investors will be taking more risks than they should. Dividends may be back, but they won’t be the same.