UK dividends soar to an unprecedented £31bn in first three months – as the annual forecast dives

28th April 2014

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Shareholder payouts from UK firms rocketed to £30.7bn in the first three months of 2014 on the back of generous special dividends but the full-year forecast has been slashed writes Philip Scott.

According to the widely observed UK Dividend Monitor from Capita Asset Services, payouts during the period were almost 120% higher than 2013’s first quarter figure.

A £15.9bn so-called special payment from Vodafone, the largest in British corporate history, made up more than half the total. However there were also substantial special payments from other household names including Next and Easyjet.

But without the special payouts, the numbers do not look as enticing as underlying dividends struggled to make much progress, rising a mere 3.3%, marking the smallest annual increase in two years.

The continuing rise of sterling, particularly against the dollar, combined with slow growth at the UK’s largest dividend payers are to blame for the overall squeeze on income. UK income investors are vulnerable to fluctuations in currency, given the dominance of big global firms listed on the London Stock Exchange, in fact 68 of the top 350 use dollars or euros and some two fifths of total UK dividends are denominated in the former currency.

As a result of the further strengthening of the pound in the first three months of 2014, Capita has been compelled to cut its expectations for the year’s dividend payouts. It now anticipates total income of £99.4bn this year, £1.7bn less than expected just three months ago – meaning the previously forecast £100bn landmark will not be hit this year.

The forecast now implies a challenging 5.4% growth in underlying dividends for the full year, with the second half set to be stronger than the first.

Justin Cooper, chief executive of Shareholder solutions, part of Capita Asset Services says: “The size of the first quarter’s dividends is extraordinary but they depend heavily on just one company.  Beneath the surface, the story is quite different. The strengthening pound is a consequence of Britain’s recovery from the most damaging downturn in a century. But it is hitting income investors hard.

“The British index is unique among the big developed stock markets for its dependence on global firms, and that means dollar earnings.  Those look much less attractive while the pound is soaring.  It’s very unusual to see so many of our biggest companies struggling to increase what they return to investors. This highlights a danger of index investing.  If you want an income, you need to understand where growth is emerging, and select your sectors and companies carefully.”

Certain sectors have been hit very hard as a result, for example oil and mining companies, which make up more than 25% of payments in the three month period, saw dividends drop sharply year-on-year. But this under-performance was not just down currency trends as weaker performance in the sector, as a result of a lower demand for commodities and natural resources also went against them.

Elsewhere, industries geared towards the UK’s recovering economy fared much better. For example, the food production industry enjoyed a payout rise of 10% while the travel and leisure sector jumped by a massive 42.5% with every company raising its payout.

Looking ahead Capita does not expect any dividend growth from three of the top five payers this year, who collectively account for 35% of the UK’s dividends. Only Vodafone and GlaxosmithKline will show growth. On the other hand Shell, BP and HSBC, are all currently set for small declines in sterling terms.

The good news according to Capita, is looking further ahead, corporate earnings will recover and the currency headwinds will almost certainly ease. “On top of this, the IPO market is flying, pointing to the underlying confidence in much of UK plc. Renewed dividend growth should follow, signalling a bright outlook for 2015,” adds Cooper.

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