Monday, 2 March 2009

Banking on dividend cuts

Following the recent dividend cuts from financials such as HSBC and JP Morgan, who have cut their dividends by more than 80%, the forward looking yield on major equity indices is likely to be reduced significantly due to the large weighting of financials within these indices. For example, financials make up 30% of the €Stoxx 50 index and they contribute circa 50% and 30% of the index's historic and projected yield. Whilst this suggests that the market has already factored in dividend cuts, any further cuts, of say 50%, could reduce the index's dividend yield by 1%, from 6.5% to 5.5%.

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