Funds and trusts hit by BP’s latest blow to UK dividends

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BP (BP) cut its dividend for the first time in a decade this week, halving the quarterly payout to 5.25 cents per share from 10.5 cents, as it slumped to a $6.7bn loss in the second quarter, in a fresh blow for reeling UK equity income hunters.

While the move was widely trailed and lacks the historic punch of Shell’s ‘shock’ cut in April, it adds to the difficulties for those searching for yield on the UK stock market, hitting many income-focused funds and investment trusts. 

Like its Anglo-Dutch rival, BP said the new payout was a ‘reset’ to help fund the costly transition to a low carbon future, rather than a temporary measure with oil demand suppressed by the coronavirus pandemic. 

Investors applauded the move, however, with BP’s shares rallying 7% to 300p on Tuesday.

Richard Hunter, head of markets at Interactive Investor, said the company had ‘finally bitten the dividend bullet’.

‘The initially positive share price move reflects appreciation of the steps being taken, and at pace, such as the dividend reduction. At the same time, it is also possible that much of the sting had already been taken out of the price,’ he said, adding it was something of a ‘relief rally’ after the poor performance of the stock.

BP shares have plunged 37% this year, while Shell’s have nearly halved. Oil has held steady above $40 in the last two months, with Brent crude trading at $43 after the announcement, but remains way down from the $66 level at which in began the year. 

‘The pandemic seems to have focused the collective mind on a renewed push towards alternative energies, which affects the oil majors both in terms of the costs of maintaining existing exposure to oil, as well as ramping up the production of renewable sources,’ Hunter added.  

He pointed out that even after the cut BP still had an implied yield around 6%, which he dubbed ‘punchy’ amid near-zero interest rates and the widespread dividend cancellations by other blue-chip. The oil giant also committed to returning at least 60% of surplus cash flow to shareholders via share buybacks once it had reduced its debt pile to $35bn. 

Helal Miah, investment research analyst at The Share Centre, said the move was ‘no surprise’ after the company’s decision not to cut in the spring, particularly once rival Shell’s two-thirds cut made BP’s management under new chief executive Bernard Looney look like it had failed to grasp the magnitude of the situation.

We were now ‘closer to completing the set’ of dividend cuts at FTSE 100 income giants that looked inevitable in this environment, he added, including the UK’s twin oil majors and five biggest banks.

Link Group said it now expected underlying UK stock market dividends – excluding special additional payments – to fall 38% from last year to £60.5bn at best, and 42% in a worst-case scenario. The UK’s biggest dividend payer is now set to be 8%-yielding British American Tobacco (BATS), according to stock broker AJ Bell. 

Worst hit funds and trusts

Several prominent funds in the Investment Association (IA)’s UK Equity Income sector hold large positions in income mainstay BP. 

The company is the top holding in the £1.8bn JOHCM UK Equity Income fund, a 6% position at the end of June, according to its factsheet. The managers have consistently flagged their expectation of a cut. However, it adds to the pain for a fund which also had a large position in Shell previously and has also been clinging onto UK banks in hopes of a rerating following their dividend cancellations. 

That series of blows is a theme across the list of the top 10 funds in the sector with the biggest weighting to BP led by £60m UBS UK Equity Income, with a 6.9% position at the end of June according to its factsheet.

RWC UK Equity Income had 5.1% in BP at the end of June and 4.6% in Shell, according to its figures, while the £287m fund was also heavily sunk into UK banks: Standard Chartered (STAN), Barclays (BARC) and RBS, recently rebranded to NatWest Group (NWG), all numbered in its top 10 holdings.

BNY Mellon’s pair of UK income funds both carry significant positions in BP, as well as 6%-plus positions in Shell.

The £971m M&G Dividend had 5.1% in BP, according to its factsheet for the end of June, with otherwise fairly defensive top holdings including pharmaceutical giants and big tobacco. 

10 income funds with big BP positions

Source: Morningstar, fund factsheets

Trusts escape unscathed?

Surprisingly few investment trusts in the Association of Investment Companies (AIC)’s UK Equity Income sector have large weightings to BP, although the company is among the top 10 of several prominent ‘dividend heroes’ – trusts which have raised payouts for 20 years or more on the trot. 

According to factsheets, the oil major was a 2.4% position in £1.3bn City of London (CTY), which has upped its dividend for 54 straight years, and 2.7% position in £332m JPMorgan Claverhouse (JCH) at the end of June.

The £482m Perpetual Income & Growth (PLI) trust had the single chunkiest position, 4.7% at the end of June, while the rival it is set to merge with, £497m Murray Income (MUT), had 1.6% in BP, according to Morningstar data.

The £798m Edinburgh (EDIN) trust, which like PLI was until recently run by Invesco’s Mark Barnett, has been reducing its stake in BP, which has fallen outside its top 10 positions under Majedie’s James de Uphaugh. 

Meanwhile, the oil company is a 3% weighting for Temple Bar (TMPL), which has the same-sized stake in Shell. The board of the £468m trust is currently seeking to shift to a ‘sustainable value’ mandate, possibly switching from investment manager Ninety One.



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