InvestmentsAug 22 2016

UK dividends fall further behind rest of the world

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UK dividends fall further behind rest of the world

Dividend payouts from UK companies are falling further behind other developed markets around the world, as the plunging value of the pound and cuts to dividends take their toll.

Henderson’s Global Dividend Index revealed UK dividends were down 3.3 per cent year-on-year in the second quarter; the weakest performance of all the G7 nations.

As profit growth remains under pressure in the UK, the potential for companies to increase their dividends has been limited, with many firms announcing cuts or cancellations to payouts.

The pound has also fallen further on the foreign exchange following the EU referendum, continuing a descent that began in the months leading up to the 23 June vote.

Alex Crooke, head of global equity income at Henderson Global Investors, said the combination of these two factors has meant UK dividends will be worth a lot less for overseas investors.

“But for UK-based investors, of course, the much weaker pound means dividend income coming from abroad is suddenly worth a lot more,” he said, adding investors have a larger selection of global companies to choose from with faster growing dividends than the UK.

Fears about dividends have been haunting the UK market for months, and Standard Life’s Thomas Moore expressed concern that some large companies were using debt to pay their dividends.

Standard Chartered, Anglo American, Barclays and Morrison were identified by Henderson as companies which made steep cuts between April and June this year.

Profit growth remains under pressure in the UK, limiting the potential for companies to increase dividends Alex Crooke

However, bearing in mind many of the UK’s largest companies pay their dividends in dollars, Mr Crooke said the impact of falling payouts will be less severe than the devaluation in sterling might suggest.

On a headline basis, the UK’s $33.7bn (£44.2bn) dividend total was 7.7 per cent higher year-on-year, but that was only due to very large special dividend payouts from companies like GlaxoSmithKline and Intercontinental Hotels.

Overall, global dividends rose 2.3 per cent on a headline basis, reaching $421.6bn (£552.1bn).

But underlying growth slowed to 1.2 per cent over the quarter, from the 3.1 per cent seen in the first three months of the year, which Mr Crooke said partly owed to a more “muted” performance from the US.

Henderson revised its global dividend forecast for the full year down to $1.16trn (£1.52trn), from $1.18trn (£1.55trn), predicting the second half of the year is likely to be weaker than the first.

“The shifting fortunes of different parts of the world highlight the value of taking a global approach to income investing,” Mr Crooke said. “As the US engine of global dividends is slowing down, so Europe is showing encouraging growth.”

Peter Lowman, chief investment officer at Investment Quorum, said: “I think we must be careful that some of Britain’s largest UK companies might be paying out more in dividends than they are making in profits.

“However, on a more positive note, the dividend payouts from many of the leading UK multi-nationals have been rewarding and have benefitted UK investors from the collapse in sterling.”

Mr Lowman said UK investors need to re-focus on companies that sit in the smaller company indices, which he said have growth and income potential.

He also said global companies are a good option in terms of equity investing, adding: “It is all about finding those businesses that have strong balance sheets, cash flow and growing dividends and then holding those companies for long periods to get the full benefit.”

katherine.denham@ft.com