UK dividend growth fails to beat inflation in 2014

UK dividend growth fails to beat inflation in 2014

Equity income investors are still feeling the pinch from the global recession as underlying payouts by UK companies suffered an inflation-adjusted decline in 2014.

While total of £97.4bn dividends were paid out to shareholders last year, showing a year-on-year increase of 21 per cent, this was propped up significantly by special dividends, particularly the £15.9bn paid out by Vodafone at the start of the year.

Excluding special dividends, the latest UK Dividend Monitor report by Capita Asset Services showed just a 1.4 per cent annual increase to £79.1bn paid out in 2014 – a decline in real terms.

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The strength of sterling through the year was a drag on earnings and payouts and Capita said underlying profits would have been roughly £2.5bn higher with currency effects stripped out.

But the fourth quarter in 2014 showed the fastest rate of dividend growth since Q3 2013, at 4 per cent, which Capita suggested was triggered by the sharp rise of the dollar against the pound, reversing some of the negative effects of the strong pound earlier in the year and accounting for half the growth in Q4.

Prospects for 2015 look brighter, with Capita forecasting dividend growth to exceed 7 per cent, thanks in part to the rising dollar because 40 per cent of dividends paid by UK companies are denominated in dollars.

But ongoing concerns over the eurozone may hamper UK dividends, as approximately 2 per cent of dividends are denominated in euros.

Following Tesco’s cancellation of its £900m final dividend, Capita’s underlying forecast for 2015 now stands at £83.6bn.

Justin Cooper, chief executive of Shareholder solutions, part of Capita Asset Services, said: “The year ahead should provide more reason for optimism among income investors.

“Certainly, the supermarket sector is under pressure, which has seen Tesco pull its dividend, and global growth is far from secure.

“On the positive side, 40 per cent of UK dividends are paid by companies reporting in dollars, so the surging greenback is by far the biggest factor, and will boost payouts, accounting for as much as half the growth we expect from FTSE 100 dividends at current exchange rates.”