The outbreak of the coronavirus has caused a catastrophe in the global markets by bringing the world to a grinding halt. The deadly pandemic was unprecedented and has claimed more than 35 thousand lives in the United Kingdom. The impact on the global markets induced by the novel coronavirus was further exacerbated by a steep plunge in oil prices caused by the oversupply of crude and lessening of oil consumption.
The broader equity benchmark index in UK, Footsie or FTSE 100 was hovering just above 7,000 mark in the last week of February 2020. Just when the markets were recovering steadily after Brexit and general elections, the unseen enemy took a toll on the UK markets by surprise. By last week of March 2020, in a month’s time, the index fell by nearly 30 per cent in value due to coronavirus impact. The UK’s small-cap index, FTSE All-Share also fell by nearly 30 per cent in value by the last week of March 2020.
A lot of wealth has been eroded due to the coronavirus impact and has left the investors high and dry. The market witnessed a lot of panic selling by investors. However, the British Prime Minister believes that the peak of the pandemic has passed. This can be validated from the fact that the markets seem to have created a bottom and are recovering gradually. This steep correction in markets implies that this could be an ideal opportunity to invest in businesses as the nation looks forward to negotiating free trade with the United States and easing of lockdown.
A lot of investors tend to invest in dividend-yielding stocks for regular income, as well as for capital appreciation in the long-term horizon. The dividend-yielding stocks ensures the profitability of the business and the resilience of the business model. Amid the coronavirus crisis, most of the businesses have slashed their dividends to prevent cash and ensure liquidity in the businesses.
To identify dividend paying stocks from a lot, the dividend yield is a popular metric used by investors. Usually, it is said that higher the dividend yield, better the investment. This method, along with other metrics such as the payout ratio can be used for better decision making.
The dividend yield is a function of the current market price of the stock and the annual dividend declared by the company. In simple terms, the dividend yield is inversely proportional to the current stock price of the company. The fluctuations in the stock price would lead to changes in the dividend yield. The fall in stock prices would lead to surge in dividend yield. Therefore, stocks with higher dividend yield attract investors, as it provides them with the opportunity to invest in businesses at a lesser price.
As the coronavirus sent shockwaves to the UK stock market in the last week of February, most of the stocks fell steeply and seem to have created a bottom by the mid of March. There is a steep correction in prices. This implies that the dividend yield of these stocks would have surged and attracted investors.
However, dividend yield does not really show the full picture. For instance, in the present scenario, the stock prices have plummeted due to coronavirus impact and businesses have slashed or delayed dividend payments. Therefore, the dividend yield would be calculated on past dividends paid, and current market prices, which would paint a rosy picture for the investors and only looking at this metric could be detrimental for the investors. So, the investors should consider the stock price movements while looking at the dividend yields.
Therefore, it is beneficial for the investors to look for other measures beyond dividend yield. Dividend payout ratio reflects the sustainability of dividend payouts made by the company. This ratio implies that what percentage of earnings is paid to investors for a unit of earnings made. In this article, we would examine the changes in the dividend yield of some of the businesses of the FTSE All-Share index amid the coronavirus crisis. (The data used for the analysis is taken from LSE and Thomson Reuters (TR))
- Amigo Holdings Plc (LON: AMGO)- Dividend yield: 47.3%
Amigo Holdings Plc is a UK based financial services company. By the end of February, the stock price of the company was hovering around GBX 35. By mid of March, the price was down to nearly GBX 14. During the same period, as evident from the chart below, the Dividend yield reached new highs due to a fall in stock prices. On the flip side, the Dividend payout ratio for Amigo Holdings was around 69 per cent. While writing, the stock traded at GBX 24.95, up by 11.88 per cent from previous day close.
(Dividend yield chart: TR)
- Galliford Try Holdings Plc (LON: GFRD)- Dividend yield: 29.2%
Galliford Try Holdings Plc is a construction company based in UK. By the end of February, the stock price of the company was hovering around GBX 154. By mid of March, the price was down to nearly GBX 117. During the same period, as evident from the chart below, the Dividend yield breached 40 per cent due to a fall in stock prices. On the flip side, the Dividend payout ratio for Galliford Try Holdings was around 73.89 per cent. While writing, the stock traded at GBX 120.56, marginally up by 0.47 per cent from the previous day close.
(Dividend yield chart: TR)
- International Consolidated Airlines Group SA (LON: IAG)- Dividend yield: 20.5%
International Consolidated Airlines Group is a UK based travel & leisure company. By the end of February, the stock price of the company was hovering around GBX 472. By mid of March, the price was down to nearly GBX 250. During the same period, as evident from the chart below, the Dividend yield reached new highs due to a fall in stock prices. On the flip side, the Dividend payout ratio for International Consolidated Airlines Group was around 16.32 per cent. While writing, the stock traded at GBX 207.50, marginally up by 4.35 per cent from the previous day close.
(Dividend yield chart: TR)
Thus, it can be inferred from the above examples that the dividend yields of the FTSE All-Share businesses have surged during the peak of the coronavirus crisis. Dividend Payout ratio should also be considered as it gives a better indication if the company is financially sound and would be able to sustain its future dividends.