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Pay day

19 November 2014

Dividends from UK companies continue to offer hope for income-seeking investors.

Dividends payments by UK companies have had a strong run since the financial crisis, but the pace of growth has slowed more recently; and in the third-quarter the momentum for regular, as opposed to one-off payments, looks to have stalled. However, despite the combination of a strong pound, a slowing global economy and muted earnings growth curbing the rate of dividend growth, overall payments look set to close the year up by around 65% from 2010.

Latest figures from Capita Asset Services reveal that UK companies rewarded their shareholders with dividend payments of £25.5 billion in the third quarter, which was £53 million, or 0.2%, more than the same period last year. Although regular dividends fell back by 2.9% from the previous quarter, special payments totalled £1.1 billion compared with £328 million a year earlier. The pace of growth has fallen off since 2011 amid sluggish global economic growth and corporate earnings, but with an expected improvement in global economic and corporate conditions, investors could well hold out for a resumption of growth in 2015.

Capita has trimmed its overall forecast for 2014 to £97.1 billion from £101.8 billion, although regular payouts are expected to be £79.3 billion, up 1.7% from 2013. However, the positive signs for the global economy and business in 2015 have prompted Capita to forecast a 5.5% increase in regular dividend payments next year.

Vodafone’s call

There have been some milestones amid the recent dividend slowdown. Vodafone earlier this year distributed a huge £15.9 billion to its shareholders from the proceeds of the disposal of its US interests, although the company is unlikely to sustain previous regular dividend levels. Capita notes: “In a sense, Vodafone’s investors were paid up front in a lump sum for income that would otherwise have flowed over time from the US.” The Vodafone payout in the first quarter overshadowed subsequent payments and overall figures from the other top five payers: Royal Dutch Shell, HSBC, BP and National Grid. 

Payments by smaller companies have grown faster than those from larger businesses over the quarter. Although the £22.8 billion paid out over the quarter by FTSE 100 companies overshadowed the £2.2 billion distributed by FTSE 250 companies, the latter continued a strong recent run of dividend growth, with 7.6% more paid out to investors than the second quarter (and if one-off payments are excluded the growth rate for these companies was 16%). The smaller cap components of the index performed particularly strongly (although these make up only around 2% of the total payments by UK companies).

Notable payouts over the quarter included Intercontinental Hotels with £500 million returned to investors, as well as Direct Line, Kingfisher, Next and Taylor Wimpey. The year has been marked so far by a higher level of special dividends, with 38 by the end of October, compared to 29 for the full year in 2013. Special dividends came from sectors exposed to more confident British consumers, given the economic upswing enjoyed in the UK. Consumer services firms raised their pay-outs by 26% from a year earlier. But, with Tesco and other UK supermarkets embroiled in a difficult autumn, Capita suggests that investors should steel themselves for lower dividends from Britain’s food retailers.

Sterling work

Despite the recent weakening of the pound against the US dollar, sterling’s year-on-year strength has eroded dividends. However, there have been winners as well as losers. US dollar-denominated energy majors BP and Shell benefitted from the dip in the pound around the time of the Scottish Referendum; while the pound’s strength earlier in the quarter eroded payments by HSBC and AstraZeneca. Sectors that felt the pressure of a strong pound included consumer goods, in particular drinks group SABMiller. Overall, property-related stock and general insurers delivered healthy pay- outs, while banks, including HSBC, and life insurers weakened. The initial dividend from Royal Mail was another highlight. Cyclical sectors paid higher dividends than defensive stock as the UK economy continued its recovery.

Income-seeking investors continue to face the challenge of historic low yields from other asset classes, such as fixed income and cash. In such an environment dividend income from UK companies offers some important respite and an opportunity to tap into the slowly-improving economic outlook. Capita, on a twelve month forecast, expects the FTSE 100 to yield 4.1% compared with 4.3% in July. Coupled with expectations of steady growth in dividends in 2015 to help counter the effects of inflation, it is clear that equities remain an attractive and key component of an overall income strategy.

FTSE International Limited (“FTSE”) © FTSE 2014. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Some of the products and investment structures documented within this article will not be available to our clients in Asia. For information on the funds that are available please get in touch.

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