It’s clear investors face challenges when it comes to getting dividends. About half of the FTSE 100’s companies have now cut or suspended shareholder rewards. However, despite the doom and gloom, I think these three shares could come back stronger once conditions return to a more normal state.
A banking share forced to cut its dividends
The first is Lloyds (LSE: LLOY). The share price has fallen nearly 50% over the last six months alone. The shares are now lower than they were five years ago. But the mandated, or strongly encouraged, suspension of bank dividends during the crisis could help Lloyds further strengthen its balance sheet. It already has a tight control on costs and has further scope for digitisation.
The dividend suspension could also help it to partially offset the expected uptick in bad loans that will result from customers losing jobs and generally being less financially secure.
Overall, I think the shares, on a P/E of nine, look too cheap to ignore right now. Yes, interest rates are very low and it’s a difficult time for banks. But I expect Lloyds, with its low costs and relatively simple business model, to come back stronger post-Covid-19.
Room for improvement at this FTSE 100 giant
Aviva (LSE: AV) is another share that has potential in the long term. The shares are dirt-cheap on a P/E of only a little more than four. Management also took the decision to cut the dividend, which will free up a lot of cash for the group.
Again, the operating environment is difficult for Aviva. Back in May it said it expected to pay a net £160m of claims related to the coronavirus shutdown with the majority of payments being in business interruption, travel insurance and commercial lines.
The UK’s biggest insurer said the crisis posed challenges to meeting its 2022 targets, warning that second-quarter sales had already been hit.
UK insurers have also been ordered to offer payment holidays to customers. It’s clear that regulators are applying a lot of pressure to companies like Aviva and it’s unclear when things might improve.
Yet for all these downsides, I do think Aviva can bounce back. Over the long term, I think the business can be made leaner and grow in annuities like rival Legal & General is doing.
A riskier FTSE 100 share
My third share is a more risky one and it’s BT (LSE: BT). It has suspended its dividend for the first time since its 1984 privatisation. The cut was far from unexpected though.
It could be argued that management had already tried to delay a cut for too long. Now coronavirus has given it a clear excuse to suspend the dividend.
I’m optimistic about the shares because the dividend frees up cash for BT to invest. It should also give it a little more leeway with the regulator, with which, under the previous CEO, it was locking horns.
I do expect BT shares to come back stronger. I’m reassured that the professional investors at Merchants Trust think the situation in the telecoms industry is improving. They bought shares back in March, which I think is a good sign.
The post These shares have cut their dividends but I think they could come back stronger appeared first on The Motley Fool UK.
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Andy Ross owns shares in Lloyds Banking Group, Merchants Trust and Legal & General. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2020