At face value the dividend outlook looks healthy, with the latest UK Dividend Monitor from Capita Asset Services noting that dividends for the first quarter of 2017 increased by 9.5 per cent compared with the same period in 2016, to £15.4 billion.
Most of the growth was concentrated in underlying payouts (up 16.2 per cent to £15.3 billion) rather than one-off ‘special dividends’, which declined by 90 per cent to £110 million – their lowest level for almost six years.
But there is a sting in the tail. The impressive dividend growth numbers are a reflection of exchange rate gains in the internationally oriented FTSE 100, rather than structural strength. The pound was 15 per cent weaker in dollar terms than in Q1 2016.
Taking sterling’s weakness out of the equation, underlying dividends actually fell marginally.
The bulk of the headline growth was concentrated in the top 100 companies, which produced £13.7 billion of the total. According to Capita, FTSE 100 dividends increased by almost 17 per cent, but almost nine tenths of that was due to the weakness of the pound.
‘Growth on a constant-currency basis was less than 2 per cent,’ concluded the report. That was compounded by the fact that, unusually, there were no specials paid by the FTSE 100 over this period.
In contrast, mid cap companies, where 90 per cent of dividends are declared in sterling, were much less affected by exchange rates. Mid-caps saw underlying growth and headline growth of just over 11 per cent, outperforming large caps after the impact of currency movements was accounted for.
Additionally, growth in dividends was boosted by an unexpectedly high rebound in dividends from BHP Billiton, after a £1.2 billion cut last year, accounting for 3.5 per cent of the headline rate. If this is taken out of the equation, FTSE 100 dividends fell on a constant-currency basis.
Overall, 11 out of 17 industrial sectors paid more this year than in 2016. Those that showed strongest performance were the oil, gas, mining, consumer goods, housebuilding and telecoms industries. Oil, gas and energy companies saw dividend payments boom with a 20 per cent increase, but as Capita points out, Shell and BP paid the same per share as they did in 2016, so the vast majority of the uplift was due to exchange rate movements.
Looking ahead, lower special dividends and the expectation that sterling will strengthen on the back of a Tory victory in the upcoming election are combining to depress forecasts for the rest of the year. Capita anticipates a reduction of £400 million to £87.1 billion for 2017, a rise of just 2.8 per cent compared to 2016.
In terms of yield, rising share prices meant that the prospective yield for the coming 12 months from UK shares fell from 3.7 to 3.6 per cent. The FTSE 100 is set to yield 3.8 per cent, while mid-caps yield 2.6 per cent.
With global economic news more positive, there is reason to expect an upturn in company earnings generally, and eventually dividends. But the fortunes of the FTSE 100’s dividends are also closely linked to the exchange rate.
Justin Cooper, Chief Executive of Shareholder solutions, part of Capita Asset Services, said: ‘Global growth is picking up strongly, and that should spur expansion in company earnings. Dividends will benefit in concert, though they tend to lag profit growth by about six months. That bodes well for the top 100, but in the meantime, the exciting story rests with the mid-caps.
‘We think the mid-caps will continue to outperform their larger counterparts this year on a constant-currency basis, while the top 100 will lose the shine sterling’s weakness has burnished them with.’
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