Furlough recipients face fresh dividend decision

Some of the UK’s largest recipients of furlough support remain undecided on whether to refund the taxpayer before establishing a roadmap for shareholder returns, in a sign of the complex governance decisions facing boards as lockdowns are slowly lifted this year.

The dilemma was given fresh impetus this week after the government published data highlighting the levels of furlough support for some of the public companies most affected by the pandemic, including pub chains JD Wetherspoon (JDW), Mitchells & Butlers (MAB) and Marston’s (MARS) and leisure groups Whitbread (WTB), easyJet (EZJ) and British Airways-owner International Consolidated Airlines (IAG) (see table below).

The UK chancellor is expected to extend the furlough scheme in the budget on Wednesday, providing a fresh lifeline to those businesses unable to open during lockdown, but potentially tying directors’ hands to larger repayment pledges in the coming annual meetings season.

Though some public companies have repaid furlough support following better than expected trading in the second half of 2020, other major employers canvassed for this article are yet to decide whether to pay back funds when earnings recover. As with a rising corporation tax, this carries implications for companies’ investment and de-leveraging options over the next few years, as well as dividends.

Furlough recipients are also coming under growing scrutiny from governance-focused investors. This week, the asset management giant Fidelity International wrote to the bosses of FTSE 350 firms to warn it would vote against director bonuses for companies that have accessed government support measures in the last year, including the UK furlough scheme.

However, in a separate statement, the group’s global head of stewardship and sustainable investing Jenn-Hui Tan described dividends and director pay “as separate issues”, but argued that the primary focus should be “financial stability and long term sustainability”. 

“We know that dividends play an invaluable role in the economy, especially for long-term savers and this should not be underestimated,” said Tan. “Each company and sector will be different, but in general, we would only advocate for resumption of dividends and buybacks when the situation stabilises.”

Before that happens, boardrooms will need to decide whether to prioritise shareholders at the risk of a taxpayer backlash, as the government costs for handling the pandemic have exploded.

Last year, Investors’ Chronicle reported that several companies had declared dividends despite having claimed and then kept employee support. While the original furlough scheme placed no such obligation on businesses, the government said it expected large employers to renounce dividend payments when it updated the scheme in November.

On balance, companies have attempted to pay back furlough support where possible. Last autumn, Kingfisher (KGF) said it would return the £23m it had received from the scheme after trading at  subsidiaries B&Q and Screwfix benefited from a home improvement boom.

Sometimes, a civic approach has brought its own costs. Fellow home furnishings group Dunelm (DNLM), which followed Kingfisher in returning the £14.5m in furlough support it had received after a surge in online sales, was forced to close all but one of its stores with the arrival of a third national lockdown. Conservative cash management and robust trading still allowed the group to declare a 12p-a-share dividend with its interim results.

“Furlough has worked basically to stop businesses sacking staff, and help them get to the point where you can see and feel recovery and to know that those jobs aren’t lost,” said Peel Hunt retail analyst John Stevenson. “But at one point do you say ‘we don’t need this’? It’s not clear cut, and Dunelm have [repaid] because they can afford it. If they’d been heavily-leveraged and owned by private equity it would probably be different.”

Boardroom response varies

It’s a dilemma companies continue to wrestle with. We asked dozens of the UK’s largest employers whether they planned to pay any dividends before refunding the money they claimed to furlough workers. Despite optimism for an imminent return to shareholder payouts, the vast majority of respondents remained reluctant to commit to a decision.

Last July, Rolls Royce announced that any furlough support the group received for UK employees whom it later made redundant would be refunded, once it was in a “stronger position”. But a spokesperson for the FTSE 100 engine-maker said the company had not decided if it would do so before resuming dividend payments, which it suspended last year. The person added that approximately £45m in furlough support had been received from the UK government in 2020, with about 2,000 employees still on furlough in December; official data show the firm received at least £2.5m from the government during that month alone.

Another significant beneficiary of government furlough schemes, Associated British Foods (ABF), is also undecided on when to lift its suspension of dividend payments. A spokesperson for the firm said that its retail outlet, Primark, had claimed job support in 11 markets where it operates, with £98m received in the year to September. The person added that it would be “premature to comment” on whether this money would be repaid before the company resumed shareholder payouts, with many of its stores still closed due to pandemic restrictions.

The consensus among analysts is that neither Rolls Royce nor Associated British Foods will see a strong return to free cash flow – a proxy for the ability to pay dividends – anytime soon. Rolls Royce, which has been devastated by the shutdown of the aviation market, is not expected to resume dividends until 2022 – albeit with a payout less than a quarter the size of the one paid in 2019. The delay will only be prolonged if these companies eventually decide that excess cash should be committed to refunding furlough support before shareholder rewards are back on the table.

Other large companies that have been less dependent on job retention schemes during the pandemic are likely to face an easier choice. A spokesperson for Wood Group (WG.) said the FTSE 250 engineering firm had received only a “modest” $6m (£4.3m) from the UK furlough scheme; analysts’ consensus is for the company to deliver free cash flow of £107m this year. But even in this instance, the person said it was too early to confirm whether that money would be used to refund furlough support before paying dividends, as it focuses on building a strong balance sheet.

But some businesses, including manufacturing firm Melrose Industries (MRO) and outsourcing company Serco (SRP), have decided to reimburse all money claimed through furlough schemes. Serco, which has run large parts of the UK’s test and trace scheme, announced last week that it would pay its first dividend in seven years, after deciding in December to repay the government support it had received.

Others, meanwhile, confirmed they would not be following in these companies’ footsteps, despite the potential reputational risks. A spokesperson for catering group Compass (CPG), which was recently criticised for sending inadequate food parcels to schoolchildren during the pandemic, said the firm would not be refunding the £437m it had received in government support, adding that the purpose of furlough schemes was “to protect jobs and aid economic recovery”. The person added, however, that the company had refunded £600m drawn from the Bank of England’s lending scheme, and the resumption of dividends would only be made “at the appropriate time”.

JD Wetherspoon (JDW), which accepted at least £25m from the UK’s job retention scheme in December alone, also seems unlikely to consider refunding furlough support - whether or not this would be manageable on a short term basis - before resuming dividends. A spokesperson for the pub chain run by Tim Martin, who has been a consistent critic of the government throughout the Covid crisis, claimed the group had in fact been a “net contributor” to the state during the pandemic, as the amount the business, its staff and customers paid in tax greatly “exceeded any temporary rebates or furlough payments”.