2020 has been a terrible year for dividends, but a dividend recovery is now underway. Many companies are now reinstating their dividends and even paying the dividends that were cut to shareholders.
A dividend recovery stock with a brighter future
In a trading update back in September, packaging company DS Smith (LSE: SMDS), said it has more confidence in the future. As a result, it would pay an interim dividend.
Since then, the firm has declared an interim dividend of 4p per share, even as its half-year profit before tax fell 54% to £97m. Management at DS Smith believes market conditions have stabilised in recent months, which makes sense when you realise one of its big end markets is e-commerce.
I think DS Smith took the chance of a dividend suspension during the worst of the pandemic to help it cut its debt. At least I hope that’s what it did. If so, it’ll be good for shareholders.
As will investment in the business. The packaging group recently announced it’s to build two packaging plants in unspecified “fast growth” regions. They will be built to supply the e-commerce sector.
Overall then DS Smith has rebased its payout to lower than pre-pandemic levels. The implication of that is it should be able to have higher dividend growth. That to me makes it a UK share with an exciting dividend recovery story. It could be a good stock to own in 2021.
Two other companies I like
The insurer Admiral and the housebuilder Persimmon are two listed groups that have dividend recovery potential. The former paid a dividend of 91.2p in 2020 including a deferred final dividend because of the pandemic. That was compared to a dividend of 119.3p per share in 2019. The insurer then has plenty of room I think to grow its payout to shareholders.
Persimmon has already laid out its plan to pay as much to shareholders in 2021 as it did in 2019. That’s after a massive dip this year, which is understandable given fears over the economy. The 110p dividend per share this year is less than half what shareholders got the previous year. So again there’s plenty of room for growth.
Underpinning the growth in the dividend and the recovery from the pandemic is that fact that in my view both these FTSE 100 companies are quality groups.
Admiral’s share price was relatively steady during the worst of the pandemic back in March. Since then the share price has really been motoring. The performance of the business explains this. In the six months to 30 June, pre-tax profit rose 31% to £286.1m. An impressive performance for a big business.
Persimmon too has been historically a solid performer and one of the more expensive, share-price wise of the housebuilders when you look at price-to-book value. I expect it’ll keep delivering for investors in an industry that creates high margins.
There’s a recovery underway and I think these shares will do better than most in 2021, especially when it comes to their shareholder payouts.
