22nd August 2016
UK dividends are falling further behind the world’s other developed markets, according to the Henderson Global Dividend Index, as cuts from some of the UK’s largest listed companies and, for overseas investors, a falling pound take their toll.
In underlying terms, UK dividends fell 3.3% year on year in the second quarter, the weakest performance in the G7. Standard Chartered, Anglo American, Barclays and WM Morrison were among those who made steep cuts. On a headline basis, the UK’s US$33.7bn total was 7.7% higher year on year, but that was only thanks to very large special dividends from GlaxoSmithKline and Intercontinental Hotels, among others.
Overall, global dividends rose 2.3% on a headline basis, reaching $421.6bn, an increase of $9.7bn year on year. Underlying growth was 1.2%. This is slower than the 3.1% underlying growth seen in the first quarter, partly reflecting Q2 seasonal patterns that give greater weight to slower growing parts of the world, and partly owing to a more muted performance from the US. US dividend growth of 4.6% on an underlying basis was the slowest since 2013, reflecting subdued profit expansion, partly due to the impact of a strong dollar. This US slowdown began late last year but should be considered a normalisation to more sustainable levels of dividend growth after several quarters of double digit increases.
European dividends of $140.2bn made up two-fifths of the global second-quarter total, with two thirds of European dividends being paid during the period. Underlying growth was an impressive 4.1%, particularly considering the large cuts from Deutsche Bank and Volkswagen, which together subtracted 2% from the European total. Indeed, the Netherlands and France saw the second and third fastest growth in the world. Over 80% of Europe’s 2016 dividends have now been paid, highlighting encouraging dividend trends for income investors across a broad number of European sectors and countries.
Elsewhere in the world, Japanese dividend growth was 28.8% in headline terms, but most of this increase was due to the strength of the Japanese currency. In underlying terms, Japanese dividends fell 0.8% as company earnings were depressed by this same factor. Toyota Motor was a case in point, reducing its final dividend by 12% in yen terms and citing the impact of the yen on its profits. Dividends in emerging markets fell sharply year on year, but performed better in Asia-Pacific.
The second half of the year is likely to be weaker than the first, partly because seasonal patterns mean the emphasis shifts slightly towards those parts of the world where dividends are growing more slowly, like emerging markets, Australia, and the UK. As a result of the Q2 trends, Henderson has reduced its forecast for the full year to $1.16 trillion, down from $1.18 trillion. This is equivalent to a headline expansion of 1.1%, or 1.4% on an underlying basis.
Alex Crooke, Head of Global Equity Income at Henderson Global Investors said: “Profit growth remains under pressure in the UK, limiting the potential for companies to increase dividends. Moreover, since the UK’s decision to leave the EU at the end of June, the pound has fallen further on the foreign exchange markets, extending a descent that began in the months running up to the referendum. For overseas investors, that means UK dividends will be worth sharply less, though with many of the UK’s largest companies paying their dividends in dollars, the impact will be less severe than the pound’s devaluation might suggest. What’s more, UK dividends only make up 10% of the global total, so global investors need not be too concerned about their overall portfolio.
“For UK-based investors, of course, the much weaker pound means dividend income coming from abroad is suddenly worth a lot more. Looking globally for income has not only provided UK investors with the opportunity to invest from a larger selection of companies with faster growing dividends than the UK can muster at present, it has also protected them in the short term from the impact of the Brexit vote.
“The shifting fortunes of different parts of the world highlight the value of taking a global approach to income investing. As the US engine of global dividends is slowing down, so Europe is showing encouraging growth.”