Dividend payouts set to reach record level

Dividend payouts set to reach record level

Companies in the UK and Europe are expected to dish out a record level of dividends this year, despite the Brexit vote pushing down the value of the pound and the political uncertainty in light of the looming European elections.

Dividend payouts are set to reach €315bn (£272bn) during 2017, eclipsing the record €302bn (£261bn) paid by stocks in the MSCI Europe last year, according to figures from Allianz Global Investors.

These findings come despite investment veterans warning of the worryingly thin dividend cover of some companies in the UK, with firms increasingly using debt to maintain payouts to investors.

Dividends in the UK had also been depressed by the weak sterling pulling down overall earnings from companies without large overseas operations.

However, Jörg de Vries-Hippen, the chief investment officer of the European equity team at Allianz, said there are signals of an economic spring in many Euroland countries going into this year.

Although many EU states such as France, the Netherlands and Germany are reshuffling their political card decks this year, Mr de Vries-Hippen said these elections are unlikely to pose serious problems for Europe.

In fact at the company level, in-house analysts at Allianz Global Investors expect higher profits and improved margins across Europe, particularly with strong economies in countries like Germany and Switzerland.

"Stable, continuous cash flows can be distributed through above-average dividend payments,” he said, pointing out that investments in resilient businesses should pay off.

The triggering of Article 50, which will set the ball rolling for the UK to unravel from Europe, will also affect British businesses. 

But Mr de Vries-Hippen disputed whether there was much reason for doom and gloom when it comes to the future of sustainable dividend payouts in the UK, largely because the large companies are global businesses, meaning they have little correlation with the UK political landscape.

Investors have been ploughing into dividend-paying funds recently as they search across the low-yield environment for some kind of income.

Mr de Vries-Hippen said: "Even if interest rates are likely to start to bounce back from their all-time low this year, they are unlikely to catch up with the return level of dividends soon." 

At the end of 2016, the average dividend yield was around 3.5 per cent across Europe.

Scott Gallacher, director at Leicester-based Rowley Turton, said: "A relatively high dividend payout is regarded by some investors as a good thing as it means that the company has less money to reinvest in vanity projects."

He pointed out that Brexit weakened the pound, which generally boosted UK companies overseas earnings, adding he was not worried about companies not being able to pay out dividends.

"It’s hard to ignore the noise of the macro issues, but generally businesses carry on regardless of the political situation. However, concerns do remain with regards to low dividend cover in the UK."