Dip in dividends poses threat to pensions

9 February 2010

Dividend payments by UK companies fell by £10 billion in 2009, it has been reported.

As a result, many pension funds are now dependent on just a handful of major companies, five of which - BP, Shell, HSBC, Vodafone and GlaxoSmithKline - were responsible for 47 per cent of dividend payments.

According to figures from Capita Registrars Research, UK companies paid £56.9 billion to investors and shareholders last year, a drop of 15 per cent on the amount distributed in dividends in 2008.

Some 202 firms reduced their payments, while 74 offered investors nothing at all; 179 companies increased their dividend yield and 60 kept them steady.

Although Capita predicted a recovery in dividends this year, with payments forecast to rise by 5 per cent, last year's decline has left pension funds exposed.

A downturn in dividends puts pressure on funds, which need an even greater stock of assets in order to generate the money required to finance pension payments.

Paul Taylor, head of dividends at Capita, said: "The recession has hit dividends particularly hard because companies have not only had to cope with falling profits, but also massive pressure on their ability to finance themselves. Preserving cash has been a top priority,

"Much of the banking sector is either in state or foreign hands, while the ability of the remaining independents to pay dividends is severely constrained by the need to rebuild their balance sheets. Among retailers, only the supermarkets have managed to keep the dividends flowing."

During the past two years, Capita reported, companies have paid out £123 billion in dividends while taking up £124 billion in capital raising schemes to bolster balance sheets. Last year, shareholders put £73 billion into new equity, £16 billion more than was paid out in dividends.

With so many companies seeking to secure extra capital, shareholders have become net payers rather than recipients of money.

Mr Taylor added: "It's no wonder dividend payments have collapsed so dramatically. It would make little sense to pay out dividends, on which most investors must pay tax, only to demand the same money back as part of a rights issue."