Hugh Yarrow and Ben Peters, who both manage the £934m Evenlode Income fund, have described the outlook for dividends in the UK as “very mixed” after several large companies reduced or cancelled payments over the past year or so.
The duo pointed to a number of factors which have led to dividend cuts, including industry difficulties, large capital investment requirements, poor cash generation and high debt levels.
This comes less than two months after Thomas Moore, the manager of Standard Life’s £1.2bn UK Equity Income fund, warned the UK market is under threat from large companies increasingly using debt to pay their dividends.
Echoing these concerns, Mr Yarrow said a business whose dividend is not covered by free cash flow will be using increased borrowings to fund some of its dividend, which he added it “clearly” not sustainable over the long-term.
“Such companies may end up under-investing to cover today’s dividend, which will lower the longer-term dividend growth potential, or they may need to cut their dividend,” he said, adding some companies in the market, such as the oil majors, are generating negligible or negative free cash flow.
Mr Yarrow said the larger the free cash flow headroom on a dividend, the more of a safety buffer the company has in more difficult times, such as a downturn in the overall economy or a downturn in the industry the company operates in.
According to the Evenlode Sustainable Dividend report, certain sectors are likely to suffer the most in terms of future dividend payments in light of the referendum in the UK, including domestic sectors such as banks, commercial property, construction, house builders and retailers.
But Mr Yarrow said UK listed multi-nationals will benefit from the weaker pound when their global cash flows are used to pay sterling dividends.
The fund management duo identified 10 companies – nine of which are global companies – that are well-placed to deliver sustainable dividend streams over the next five years.
| Market Cap | Dividend Yield Forecast For Next Full Year | Five Year Average Growth Rate Per Year | |
| 1. Sage | £7.1bn | 2.5% | +10% |
| 2. Compass | £23.6bn | 2.5% | +10% |
| 3. Spectris | £2.2bn | 2.9% | +12% |
| 4. PayPoint | £0.6bn | 4.9% | +13% |
| 5. RWS Holdings | £0.5bn | 2.5% | +13% |
| 6. Page Group | £1bn | 4.3% | +5% |
| 7. Unilever | £106.5bn | 3% | +4% |
| 8. Fidessa | £0.9bn | 3.7% | +1% |
| 9. Victrex | £1.3bn | 3.9% | +13% |
| 10. Spirax Sarco | £2.8bn | 2.0% | +8% |
| Average | £14.7bn | 3.2% | +9% |
Mr Peters said all the companies in the list have strong balance sheets, and six of the ten have no borrowings at all, adding they are ‘self-funding’, meaning they generate more than enough free cash flow to fund both future investments in the business and current dividend payments.
“These companies also have good long-term growth potential in our view, but as asset-light companies only need to invest a relatively small proportion of cash flow back into the business to generate this growth – leaving plenty of spare cash each year to provide progressive dividends.”
katherine.denham@ft.com
