18th July 2016
Sterling’s devaluation in the months running up to, and especially in the days following, the UK’s vote to leave the EU is set to boost UK dividends by £4.3bn this year, according to the latest Dividend Monitor from Capita Asset Services.
Two fifths of the dividends paid by UK-listed companies are declared in dollars or euros, reflecting the international nature of the UK stock market. As the pound fell in the wake of the EU referendum, these payments are being converted at a much weaker exchange rate, bringing a huge boost to income investors based in the UK. In the second half of the year alone, Capita expects exchange rate gains of just over £2.8bn, adding to the £1.4bn already booked in the first half as the pound gradually sank ahead of the historic plebiscite.
This has dramatically changed the picture for UK dividends in 2016. Even though steep cuts are still coming through from a number of large mining concerns, banks and others, overall, they are being largely offset by the much weaker pound.
Top 100 share prices reacted quickly to offset the pound’s collapse, but mid-cap share prices fell as investors absorbed the likelihood that their greater exposure to the UK economy would hit their profitability. By the end of the quarter, the yield on all UK equities for the coming year held steady at 3.7%, far in excess of the income on other asset classes. UK bond yields hit new lows of 0.8% in the aftermath of the vote, while cash deposits continue to languish.
In addition to exchange rate gains, a flurry of large special dividends in the second quarter is swelling investors’ bank balances. In total, they more than quadrupled year on year to £3.5bn. The largest was from Intercontinental Hotels, which distributed £1bn after selling hotels in Paris and Hong Kong, while Glaxosmithkline paid out £970m following an asset swap with Novartis. Meanwhile, bumper earnings at ITV brought a £400m windfall for its shareholders, and Lloyds Bank paid out an extra £360m as its capital position strengthened. In total, 22 companies paid a special dividend in Q2, easily the largest number on record for any quarter. By value, this was the third largest total on record for any quarter. Overall, special payouts propelled Q2 dividends to a record £28.8bn in Q2.
Beneath the froth of special dividends, the underlying performance was less exciting. Dividends fell 2.7% year on year to £25.2bn, in line with our pre-Brexit forecast as cuts from Standard Chartered, Anglo American, Barclays and Morrison took their toll. UK plc profitability has been poor over the last couple of years. Dividends have held up much better than profits, but that means dividend cover (the ratio of profits to dividends) has fallen to very low levels. Inevitably, dividend growth is difficult to sustain in those circumstances, and this explains why the underlying picture has been weak.
For the full year 2016, these momentous events mean Capita has upgraded its forecast for UK dividends by £4.5bn to £82.5bn, an increase of 3.8% compared to 2015. It has upgraded underlying dividends (which exclude specials) by £1.9bn to £76.9bn, an increase of 0.5% compared to 2015.
Justin Cooper, chief executive of Shareholder solutions, part of Capita Asset Services said: “The Brexit vote has completely changed the picture for dividends this year and beyond. The timetable for the UK’s departure from the EU, and the manner of its subsequent relationship with it, are crucial to understanding the future for income investors.”
“In the short term, investment and consumption will be depressed while the country waits for a response from the new government, and for a Brexit timetable to emerge. Dividends will suffer from any slowdown in economic growth, particularly among the UK’s mid-cap companies, though a persistently weak exchange rate will cushion sterling investors in the UK’s large multinationals.
“The longer term is difficult to predict. It depends on negotiations and implications regarding access to the single market and external trade negotiations with non-EU countries.”
Laith Khalaf, Senior Analyst, Hargreaves Lansdown says: “Dividends are an investor’s best friend, particularly with interest rates on the floor and showing no sign of picking up. In a low growth world, dividends represent one in the hand rather than two in the bush, and should be considered as a way of boosting total returns, as well as generating income.
“While stock prices have risen to reflect the overseas earnings of many UK companies, existing investors can look forward to harvesting the extra payments resulting from a weaker pound. For new investors, a yield of 3.7% still looks attractive in a world where cash is yielding next to nothing, and bonds are not far behind.”
Capita Asset Services analyses all the dividends paid out on the ordinary shares of companies listed on the UK Main Market. The research excludes investment companies such as listed investment trusts whose dividends rely on income from equities and bonds. The Dividend Monitor takes no account of taxation on dividends, which varies according to investor circumstances. The raw dividend data was provided by Exchange Data International. Other data was sourced from the London Stock Exchange.