Caught between a rock and a hard place

Shareholders are caught between between dividend cuts and rights issues in what is effectively a liquidity squeeze. As if reduced cash flows from dividends wasn't bad enough, investors are also being asked to cough up more cash by companies issuing new shares.

In the UK alone, Threadneedle forecast £50 billion of equity issuance by UK companies 2009, more than double the £23 billion issued in 2008.

The outlook for dividends is equally bleak. Standard & Poor’s forecasts the worst year for dividend cuts since 1938 for US investors. S&P forecast dividend pay-outs for 2009 to drop at least 22.6%, since cash flow is crucial for companies and their need to conserve cash will outweigh their desire to pay dividends.

Moreover, having principally affected financials, who were responsible for £16.9 billion of the total £23 billion raised from rights issues in the UK in 2008, the list of sectors issuing new shares and slashing dividends has grown considerably in 2009. Indeed, BP, whose dividends accounted for over 11% of the total dividends paid by FTSE All Share companies, is expected to freeze its dividend this year for the first time since 1999.

Investor appetite for forthcoming rights issues is likely to be severely tested. Indeed, following another new low in equity prices, investors will be wondering whether they should throw yet more good money after bad. Indeed, the investment banks who are underwriting the rights issues are charging 50% more in fees to compensate them for the risk of being left with a large rump in volatile markets.