Investors chasing high yields are perpetuating unsustainable dividend practices and in some cases damaging businesses' growth prospects, according to Stephen Bailey, manager of the Liontrust Macro Equity Income fund, a prominent fund manage. Instead of investing during downturns to increase cashflow in the long run, many companies have instead used up cash reserves and sell off assets to continue paying unsustainable dividends. The true impact of maintaining an unaffordable dividend may become clear only in the long run. There is the potential for a business to stagnate or contract as a result of an over-enthusiastic return of cash to shareholders, he said, particularly if cash-generating assets are sold in order to do so.
He highlighted the oil sector as one example. BP is yielding 6.1pc and Royal Dutch Shell yields 6.3pc, at a time when it is understood that the price of oil remains too low for sustainable operation and both are involved in selling off tens of billions of pounds' worth of assets. The major oil companies are also now operating with double the levels of debt compared with a few years ago. Two years ago mining companies were in a similar position to oil today, cutting back on capital expenditure and selling assets to combat falling demand and prices.
Mr Bailey said: “Because of dividend payments they’re not able to invest at the bottom of the cycle, so are left with the stark choice of having to sell quality assets at unattractive prices. To meet the short term cashflow shortfall that they have, they are selling tomorrow’s cashflow.”
He also highlighted RSA, the insurer, which maintained an “unsustainable yield” for years. He called this “very detrimental to the overall performance”. “The best thing they eventually did was reduce that dividend, which allowed the company to make financial progression.”