Equity IncomeOct 17 2016

UK dividend outlook 'disappointing' despite rising forecasts

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by
UK dividend outlook 'disappointing' despite rising forecasts

Capita has warned UK income investors not to get carried away with a sterling-induced spike in dividend payouts, saying the underlying market remains shaky.

The forecaster has once again revised upwards its estimate for total UK payouts this year as a weaker sterling boosts payouts from stocks issuing in dollars. The pound’s fall has more than offset deep payout cuts from mining stocks and supermarkets.

At the start of the year, Capita’s Dividend Monitor predicted underlying dividend growth would weaken this year. 

However, its third quarter report said it now expected 2016’s underlying dividends to rise 2.7 per cent on 2015, owing almost entirely to sterling’s depreciation throughout the year.

A £2.5bn currency gain on Q3 dividends was over £1bn higher than initially estimated and the largest effect in any quarter since sterling’s plunge in 2009. The “huge exchange rate gains” outstripped £2.2bn of cuts which Capita said mainly came from mining stocks.

However, the forecaster said special dividends, delayed corporate activity and the sterling factor were masking greater issues. 

When these effects were removed, dividends were 0.1 per cent lower in the third quarter compared with 2015 – a figure which also ignores the major cuts made by companies such as Rolls-Royce.

Special payouts were £500m higher than the firm predicted, while the delayed acquisition of SAB Miller by AB InBev meant the former still paid out £1.2bn, a dividend unlikely to be seen again.

“These factors make it harder to discern the real trends in UK dividends,” Capita warned. “In truth, the picture is rather disappointing.”

“Weak profitability among the UK’s largest companies, including large losses for some, as well as growing pension deficits, has made it difficult for them to increase what they pay to their shareholders.

“If we strip out both the positive effect of the exchange rate windfall, and the negative impact of high-profile dividend cuts from the mining sector and Rolls-Royce, along with a smaller one from oil engineering firm Amec Foster Wheeler, then dividends were actually 0.1 per cent lower year-on-year in the third quarter,” the report said.

Despite this, Capita said underlying dividends rose 2.6 per cent on a quarterly basis over the three months to October. Total payouts for the period exceeded expectations, with headline dividend payments hitting £2.5bn boosted by a weaker sterling. The report now predicts headline dividends will reach £84.7bn this year, with underlying payouts at £78.6bn.

Justin Cooper, chief executive of shareholder solutions at Capita Asset Services, said the firm predicted another currency windfall in Q4 of £1.7bn, meaning sterling weakness would have added £5.6bn to payouts in 2016.

He added: “Without this devaluation, however, underlying dividends will fall in 2016, and we expect more cuts in the fourth quarter.

“While exchange rate gains look set to support UK plc dividends well into 2017, investors will need a sustained improvement in company profitability in order for the true value of payouts to regain solid upward momentum.”