BT: the next big dividend cut?

Another headache for income-seekers as BT expected to announce a cut to its dividend tomorrow.

BT is expected to join the growing list of popular income-producing shares forced to cut its dividend.

The company is due to announce its revenue results tomorrow (7 May), and they are not likely to be pretty. According to Chris Beauchamp, chief market analyst at IG: “BT is expected to report revenue of £22.9 billion, down 2.3% for the year, while pre-tax profit of £2.8 billion is expected to be down 13.3% compared to a year earlier.”

Even prior to the outbreak of coronavirus, BT’s dividend looked in danger; the company has been struggling with a growing pension deficit and has had to commit large amounts of cash to the roll out of 5G and fibre broadband.

“Covid-19 will add another level of uncertainty to its prospects, which does not augur well for the dividend,” says Richard Hunter, head of markets at interactive investor (Money Observer’s parent company).

On top of this, BT’s share price has seen a dramatic decline in recent months. In December the company’s shares were trading at 200p. Now they trade at around 110p. This has given the company a yield of 13.5%.

“This in turn has prompted speculation that the group will cut back its dividend in order to conserve cash, while managing to maintain a relatively high yield compared to the FTSE 100’s 4.1%,” says Beauchamp.

Beauchamp continues: “A dividend cut for BT makes sense at this point. It is hardly the only firm to be doing so, and with a yield solidly in double digits the firm has the room to reduce the payout. But the cash burn will go on, and with economic activity likely to remain weak there will little upside for the shares for the time being.”

Hunter argues: “The question seems to be not if, but by how much, BT will take a scalpel to its dividend.” He points out that the consensus is that the company will reduce its dividend rather than cut it completely.

“Based on the previous year’s figure of 15.4p, an 8% drop to this year’s dividend is expected, along with a 35% cut to the year to March 2021, which would result in a payout of around 10p,” says Hunter.

A recent ‘sell’ note from analysts at Deutsche Bank said that they believe it now 50% likely that BT's full-year dividend will be kept at last year's level.

The prospect of a cut from BT does not bode well for UK income investors, who have already faced a slew of dividend cuts and suspensions.

According to research from ETF provider GraniteShares, a total of 162 UK-listed companies cancelled or suspended payments between 19 March and 20 April. With a total of 176 companies providing dividend updates over this period, 92% announced suspensions or cancellations.

Most notably, dividend favourite Royal Dutch Shell cut its dividend for the first time in 70 years.

Update: BT announced it will not pay a dividend for the 12 months that ended in March. It warned shareholders to expect lower dividend payments in the future. 

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