the times | Friday August 7 2020 2GM 37

CommentBusiness

Hoping to keep your big city pay

cheque in rural bliss? Dream on

C

orporate Britain is cutting

its dividend payments.

Despite this, the FTSE 100

index of the largest quoted

companies is 20 per cent

higher than it was on March 23, the

day Boris Johnson announced the

lockdown. Just this week, BP

announced its first dividend cut for a

decade yet its share price rose by

more than 6 per cent on the day.

It seems irrational, but it isn’t. I

can’t predict the performance of the

stock market but I can explain why

companies are right to cut dividends

and why investors have welcomed

the announcements. And there is a

wider financial lesson: investors

ought to be willing to forgo income

and spread their portfolios more

widely.

Let’s look first at the figures,

based on the FTSE 100 plus the

FTSE 250 index of the next biggest

tier of British companies. According

to a survey by Link Group, an

investor services company, the

quoted sector cut dividend payments

to shareholders by an aggregate

£22 billion in the second quarter.

This reduction is substantially more

than the total of dividends that were

paid out, which was just over

£16 billion. In the last financial year,

FTSE 350 companies paid a total of

£98.5 billion in dividends. This year

will fall far short.

Why have investors taken this

news in their stride? It’s common for

critics to depict the stock market as

gambling and the recovery of share

prices since March as perverse. It’s

not true. In normal economic

conditions, admittedly, if a company

announced a dividend cut, market-

makers would typically mark down

its share price. But that’s not directly

because of the lower dividend. It’s

rather because investors would see a

dividend cut as an indicator of

future difficulties. Current news is

already reflected in the price.

The coronavirus crisis is not a

normal time, however. On the

contrary, the whole corporate sector

has experienced a collapse in

revenues due to the lockdown. Even

companies whose trading has been

resilient are at risk of disruption to

their supply chains and distribution

networks. It makes sense for them

not to maintain their dividend

payout ratio or their absolute levels

of dividends, but to concentrate on

protecting their balance sheets and

liquidity. Hence the dividend cuts.

The market response to BP’s

announcement is exceptional but

again makes sense. The company,

along with other oil giants, is

seeking to move away from fossil

fuels and towards investment in

renewables and carbon capture and

storage. It needs to retain a greater

proportion of its earnings in the

business, rather than pay them out

in dividends, if it’s to achieve this

goal. Investors have bid up the BP

share price in response, in

expectation that the company will

be able to pay out higher dividends

in future as a result of achieving this

strategic shift.

On the face of it, the big losers

from the market-wide cut in

dividends are shareholders. These

include, most prominently, retail

investors who rely on a regular

stream of income, and equity

income funds that typically have a

heavy weighting in companies with

a stable earnings stream and whose

shares have a high dividend yield.

I’ve argued that dividend cuts are

not in themselves bad news. That’s

not all: investors should see them as

a warning not to be too heavily

weighted towards traditionally high-

yielding stocks. The reason is that a

portfolio that is overweight in so-

called defensive stocks is actually

quite risky. These shares will tend to

move in tandem. It’s much better

to have a diversified portfolio, and

the easiest way to get one is to

invest in a low-cost index tracker

fund. I don’t know how it will

perform, but I don’t believe there’s a

better way of getting wealthier by

gaining exposure to Britain’s

corporate sector.

Oliver Kamm

Few office workers

seem to be heeding

the prime minister’’s

pleas to go back to

their workplaces. It

was reported this week that just one

in 20 civil servants had returned to

their desks and the media is full of

stories about Canary Wharf and the

City becoming ghost towns. Large

numbers of us, it appears, rather like

the nine-to-five in the spare room.

It seems likely that a fair chunk of

the workforce will never return to

the office in quite the same way —

and may even be considering basing

themselves elsewhere. After all, if you

don’t have to commute into London,

why live in the pricey commuter belt?

My personal benchmark here is a

friend who lives near the southeast

coast. For the price of a terrace house

in Hackney she has a pool, gym and

acres of land to get lost in. Early in

the pandemic, she joked that it was

like “being locked down in my own

private leisure centre”.

Now even my solidly London

friends are nosing around picturesque

Essex fishing villages, West Country

boltholes and baronial Scottish manor

houses. On social media I see people

saying things like, “Now I know I

don’t have to be in New York, I’m

thinking of buying land in Georgia.”

Even I find myself tempted. I’m in

Devon at the moment and am

writing this from a beautiful old

manor house on Exmoor after a

hard day’s surfing.

OK, so that’s the dream. Move to

Margate, buy a fairytale Regency pad

overlooking the sea that would cost

you £10 million in Notting Hill and go

to London once a week, while still

earning a London salary. Everyone’s a

winner, except perhaps Margate

housebuyers. But what if you were

paid less because you live in Margate

or Scotland or northern California or

Georgia?

In May, Mark Zuckerberg said that

Facebook intended to become the

most forward-thinking remote

working company in the world and

that some employees would be

permitted to work remotely full-time.

Those people, he added, will need to

inform the company if they have

moved to a new location by January 1

next year. “We’ll adjust your salary to

your location at that point.”

Well, that sucks. Suddenly, the rural

dream, which has always involved

city salary plus boondocks costs — a

kind of earnings-based arbitrage —

doesn’t look quite so great.

But even though hating “Zuck” is

practically mandatory these days, I

think he has a point. If neither you

nor your job are based in an insanely

pricey city, maybe you should earn a

bit less.

I can certainly see the arguments

for the UK. According to data

crunched in 2018 by the BBC, a

one-bedroom flat in London costs

almost half the average London

earnings. Go to the northeast or

Wales and it’s under a quarter of local

earnings. On top, Londoners pay

more for virtually everything. If you

commute into London, your season

ticket can top £5,000.

Companies have long paid city

weightings (either formally or

informally) to reflect this. Back in

1974, the Pay Board recommended an

inner London weighting of £400 for

those within four miles of Charing

Cross and an outer London weighting

of £200. The Pay Board may be long

gone but London-based jobs still tend

to have higher salaries.

So perhaps if you want to work

from the Shetlands, you shouldn’t be

able to take all of your London salary

with you.

After all, there you can get a

four-bed fixer-upper with “lovely

views over a voe” (an inlet) for under

£100,000. Of course, there will be

those who say that if you do the same

job, you should be paid the same

wage. But maybe they’re not the same

job — the London-based person will

be far more easily available for

meetings and short trips to Europe

than the Shetlander.

There may even be a kind of

fairness here too. In London,

gentrification has made many

neighbourhoods unaffordable for all

but the highest earners, so perhaps

“adjusting” the salaries of former big

city workers might help prevent every

half-pleasant British town from

turning into the Cotswolds. Perhaps

Zuck is on the side of social justice

and equality here.

Or maybe not. Could diluted

gentrification be good gentrification?

The kind that results in nice old

houses being restored and a bit more

life in provincial towns without

pricing the locals out. There are,

according to the Institute for Fiscal

Studies, 310,000 Britons who earn

more than £160,000 a year (the top

1 per cent). Three fifths of these are in

London and the southeast; maybe

Wales could do with a few more.

Personally, I don’t have a dog in

this fight. For almost 20 years as a

freelance writer, I’ve been able to

work from anywhere — and I chose

to live in pricey inner London. But

this brings me to another point. Until

recently, nowhere-based jobs with

good salaries were relatively few in

number. According to the Office for

National Statistics, only 5.1 per cent of

the population worked mainly from

home in 2019.

Here, I have another insight to

offer. In the early 2000s the tax

advantages to being self-employed

were pretty great, but in recent years

they’ve eroded fast. Why? Because

there are a lot more of us than there

used to be. When any working group

is small, they often get overlooked

and can end up with some pretty

sweet perks. But once they become

numerous, these advantages tend to

fall away fairly quickly.

I suspect something similar may

happen with remote workers. If a

company is paying a handful of

people London wages to work from

Northumberland or Cornwall, it

probably can’t be bothered to change

things. But if it’s a third of the

workforce, you better believe it’s

going to start looking rather closely

at salary scales — and, in a tough

post-Covid economy, it’s going to be

a buyers’ market. Of course, you’ll

still enjoy a pretty

good salary but it

may be wise to

expect an

“adjustment”.

‘‘

’’

Rhymer Rigby is a journalist and

author. Follow him on Twitter

@rhymerrigby

Oliver Kamm is a Times leader writer

and columnist. Twitter: @OliverKamm

Dividend cuts are not

bad news but a warning

to spread your bets

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Full-year dividends paid by

UK companies (£bn)

57.6

62.0

54.1

54.6

61.8

73.9

73.4

88.9

80.1

85.8

95.1

99.8

110.5

Source: Asset Services

Rhymer Rigby