UK Edition
Questor: which stocks will have to cut their dividend if the Brexit impasse isn’t resolved?
Questor Income Portfolio: uncertainty is making share prices volatile. While dividends are more stable, some are at particular risk from the EU divorce
Questor's Income Portfolio has dipped into the red – and the current state of turmoil over Brexit must be at least partly to blame.
As shown in our full table of holdings, published here on the first Friday of the month, the annual yield produced by our collection of shares and bonds, 5.4pc, has exceeded its 5pc target but we have made a 3.3pc annualised capital loss since October 2016, when the portfolio began.
Big events such as the Brexit denouement almost inevitably lead to large movements in share prices. Dividends, fortunately, are far less volatile. So far, neither Brexit nor anything else has caused any of our stocks to cut its payout. So we are content to turn a blind eye to the paper loss we are currently suffering in capital terms as long as we see no threat to any of our dividends.
Does the Brexit crisis pose a threat to the payouts from any of our holdings – or those from other income-producing shares that readers are likely to own?
We put this question to Sue Noffke, who runs the Schroder Income Growth investment trust, one of our holdings (in which, incidentally, our original investment of £25,000 now stands at £24,164, with dividends of £1,990).
Her answer was reassuring. “From the point of view of maintaining dividends, I think most sectors are well placed to ride out the Brexit storm,” she said. “In the worst case of a no-deal exit, the likely fall in the pound will support, in sterling terms, the earnings of those stocks with overseas earnings, while those with more domestically focused operations shouldn’t be too affected either way.
“But one exception I can see is the utilities. Their raw materials, oil and gas, are priced in dollars, so their costs would go up if the pound fell, while they sell in pounds to consumers and would find it difficult politically to raise prices. Coverage of dividends by earnings and cash flow is also stretched.”
She added that the power companies were also at risk of renationalisation if a Labour government resulted from the turmoil. “I could see the utilities’ dividends coming under threat and I am avoiding them at the moment,” Noffke added.
The only utility in our portfolio is National Grid, which transmits energy rather than buying and selling it and should therefore be less affected. It remains committed to raising its dividend every year and, while accepting that a Labour government could pose a threat, we are happy to hold on to the stock.
- Questor archive: telegraph.co.uk/questor
The Brexit effect is seen in the share prices of several of our holdings. Most striking, perhaps, is Lloyds Banking Group. Laith Khalaf of Hargreaves Lansdown, the investment shop, said: “When Lloyds’ current chief executive, Antonio Horta Osorio, took over in 2011, the bank was making a loss of £260m.
"Last year it made a profit of £3.5bn – yet today the share price is lower than when Horta Osorio arrived.”
He added: “On the face of it this doesn’t make a great deal of sense. But a company’s share price is determined by the future profits investors think it can generate. The market has marked down Lloyds and other domestically focused stocks because, at best, it doesn’t know what the next year holds for their profitability while Brexit hangs in the balance.
"At worst, it fears the UK economy could deteriorate, and these companies’ profits would take a hit.”
This portfolio invested £20,000 in Lloyds two years ago and we have made a capital loss on paper of £2,403, although we have received dividends of £2,039.
Other holdings whose lacklustre performance in capital terms can be attributed in part to the Brexit uncertainty include Crest Nicholson (capital loss £4,672, dividends paid £2,883) and ULS Technology (capital loss £2,222, dividends paid £343).
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