Recent activity has brought a welcome bounce in share prices, but it is still too soon to call the end of the bear market, argues Colin McLean, fund manager at SVM Asset Management.

He points out that, with the immediate prospect of deflation, one worrying pattern seems set to continue – dividend cuts.  

‘Already this year, the biggest dividend payer on the UK market, HSBC, has halved its dividend. This follows cancelled dividends from the banks that sought government help,’ says McLean. ‘March saw insurers join the list, with no 2009 dividend from Old Mutual and a halved final dividend at Legal & General. Some consumer businesses have also scrapped pay-outs. It seems that only more defensive sectors such as pharmaceuticals, oil majors, tobaccos, utilities and food offer soundly based income.’
 
According to McLean, there is a pattern to the dividend cuts. For companies with high bank debt it makes no sense to add to borrowings by paying out cash. It has taken the reality of recent discussions with bankers to drive this message home. But other types of negotiations could imperil dividends more widely.

Even in supposedly defensive areas, some companies will need to address pensions deficits or seek help with contracts. A warning last month from the Pensions Regulator, that pensions must come before dividends, shocked many companies with pension funding deficits. 
 
Companies with dividend yields of six per cent or more are being given little credit in their share prices for the payout. Low share prices relative to the cash paid out by companies are a stock market signal to boards to be more prudent with cash.

McLean says, ‘In future, investors seeking income may make more use of corporate bonds, rather than relying on shares. However, shares have a role to play in providing income with growth prospects. 

‘Where dividends have been re-based to sustainable levels, investors should be encouraged. But the dividend yields that still look too good to be true may prove to be just that.’