The week in focus
Specialist’s plastic group Carclo has announced that it is likely it will have to stop its dividend to save its financial reserves which it needs for the company’s pension liabilities.
The board announced “Subsequent to the EU Referendum result on 23 June 2016, corporate bond yields have decreased materially in the UK and, as this yield is used to discount the Group’s pension liability under IAS 19 “Employee Benefits”, if the corporate bond yield remains at its current low level then this will result in a significant increase in the Group’s pension deficit as at 30 September 2016. This likely increased IAS 19 pension deficit would have the effect of extinguishing the Company’s available distributable reserves, in which case the Company will not be able to pay the final dividend of 1.95 pence per share, declared on 7 June 2016, on 7 October 2016 to those members that were on the register at 26 August 2016. Whilst the Board is disappointed that the final dividend is now unlikely to be capable of being paid due to these legal and accounting constraints, it intends to resume the Company’s progressive dividend policy once legal and accounting circumstances allow.”
This is at the same time as they announced “The Board is pleased to announce that the Group has continued to trade well in the current financial year and the trading performance remains in line with its expectations for the year ending 31 March 2017.”
Is this the start of a trend?
You have to wonder if this is the start of a worrying trend with UK companies. For those income seekers of you in Truro, Cornwall this will come at a time when you already have enough financial worry to deal with.
As you can see from the board’s comments it’s the decrease in corporate bond yields which has impacted it, as the yield is used in the pension liability calculation which means any reduction in yield increases the requirement on the company to have more reserves.
Yes at the moment it’s only Carclo, but you have to wonder if this is just the start of things to come. All companies are going to be hit in the same way if they have a pension deficit – only time will tell. If we start seeing more companies impacted by this then its possible investors could start seeing the amount of companies able to pay a dividend start reducing.
Early estimates suggest a further £85 billion could be added to pension scheme deficits following the Bank of England’s decision to cut rates. Although this is a problem for pension schemes it will likely impact equity income investors across the board (yes, even those of you in Newquay and Truro). Unfortunately Cornwall’s not immune.
Unfortunately equities remain one of the few sources of income paying in excess of the bank base rate. What happens to investor’s income if this source diminishes in volume and reduces in the amount paid in dividends? Dividends in the UK are already limited to a few large companies. A good adviser who can build a relationship with should be able to help you through this monetary and economic maze.
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