UK dividend growth grinds to a near halt as the strength of the pound hits payouts

21st July 2014

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Dividend payouts from UK firms have hit their worst patch in some three years as the strength of sterling takes its toll.

According to the latest UK Dividend Monitor from Capita Asset Services in the three months to the end of June, dividends – or shareholder payouts from listed companies – edged ahead by just 1.2% compared to the same period last year, to £25.8bn.

This was the smallest increase in a quarterly total since 2010, with the exception of an unusual first three months in 2013.

Excluding special dividends growth was faster but not by much. The total underlying payout inched forward 3.2% in the second quarter, making it the third weakest rate of growth in three and half years. Special dividends added £705m in the second quarter, less than the £1.2bn total in the same period a year ago.

Sub-inflationary headline level growth has been hit by falling contributions from the largest constituents of the FTSE 100.

Payouts from the top five, who account for 34% of the second quarter’s total, fell 0.3%. Among the top 15, who make up more than three fifths of the UK’s dividends, eight companies saw their payouts decline.  Dividends from the top 15 fell 0.8% year-on-year.

Given the size and global operations, these firms are the most exposed to global headwinds and the current strength of the sterling, which have hampered earnings and dividends.

The pound ended the second quarter at US$1.71, having risen 2.6% over the period. By the end of June 2014 it was 12.5% stronger against the dollar compared to a year ago.

As a result of the ongoing strengthening of the pound and slower earnings momentum, Capita Asset Services has once again cut its full year forecast for dividend income. Having already slashed it by £1.7bn in April, it has now reduced it by a further £900m, from £99.4bn to £98.5bn for the year.

This implies underlying dividends will climb 3.5% to £80.6bn. Special dividends will leap ahead to £17.9bn – up from £2.4bn last year, chiefly as a result of the Vodafone’s mega-payout at the start of the year. Based on its latest estimates, 2014 will see the slowest growth since 2010, when BP cancelled its payout.

Justin Cooper, chief executive of Shareholder solutions, part of Capita Asset Services said: “Investors saw dividend payouts begin the year with a bang thanks to Vodafone’s big special, but just one quarter on, headline growth has become a whimper, as the serious headwinds facing investors reasserted themselves. Given their size and contribution to the total amount paid out, income investors are a hostage to the fortunes of the very biggest listed companies.

“These global companies have felt the impact of a surging sterling and slowing momentum in the global economy, and struggled to maintain – let alone raise – the amount they are returning to investors. This has dragged down the performance of the whole market.”

Commodity firms and financials were the primary victims of sterling’s strength, where mining firms saw their payouts fall 10.1%.  Among financials, banks, insurers and financial services firms all paid lower dividends.

But a weak performance from the biggest payers obscured more encouraging growth from those outside the top 15, who have been more heavily impacted by the UK economic recovery. These saw an average increase in dividends of 4.4%, although they only account for two fifths of dividends paid, and this rate of growth is still sluggish by historic standards said the report.

For example, consumer services firms, up 18.1%, were buoyed by the travel and leisure sector as well as general retailers. Riding the wave of the property boom, house-builders propelled the household goods and home construction sector up 8.4%.

Cooper is however optimistic that investors should see a pick-up in 2015. He said: “It’s hard to imagine the currency continuing to detract from growth, and if the pound maintains its current level it will only have a small impact in the first half of next year. Equally, if as forecast, the global economy picks up speed, it will be felt right at the top of the FTSE 100, and this should filter its way into investors’ pockets.”

Notably while 12 month yields on equities have dropped to 4.1% following stronger share prices and weakening dividend growth, they remain higher than 10-year gilt yields, at 2.75%, property rental yields with 3.6% and cash deposits, at 1.3%.

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