Dividend growth cools as stronger pound dampens payouts

Behind this decline in underlying dividend growth was the growing strength of the pound against the US dollar.

Dividend payouts in the first three months of 2018 rose by 7.6 per cent, reaching a total of £16.7 billion, according to Link Asset Services’ latest UK Dividend Monitor report. 

The new figure was £1.1 billion higher than previously projected. However, a closer look at the numbers paints a much less rosy picture for UK dividends in the months and year ahead. 

The growth of dividend payments in the first quarter of the year was primarily the result of changes to the timing of payments. Headline dividend growth would have otherwise been much lower, at 1.2 per cent.

At the same time, underlying dividend growth (dividend payments with the exclusion of special dividends) was in negative territory, at 0.1 per cent. Special dividend payments have more than doubled compared to the first quarter of 2017.   

Behind this decline in underlying dividend growth was principally the growing strength of the pound against the US dollar. 

In prior months, the pound’s weakness had been able to boost earnings. As the chart below shows, following the crash in the value of the pound in mid-2016 after the EU-referendum, the exchange rate provided a strong boost to dividends. With the FTSE 100 dominated by multi-nationals, a weak pound benefits internationally-facing businesses as they repatriate their profits from abroad. 

However, for the past few months the pound has started to rebound, particularly against the dollar. The pound was up 12 per cent on the dollar compared to the first quarter 2017. This pushed down the sterling value of US dollar payouts by £879m.

The top 100 payers paid a total of £15bn, up 9.2 per cent year-on-year. The strongest performers in the first quarter, the report notes, were oil companies. Dividend payments from Royal Dutch Shell and BP constituted almost a quarter of all dividend payouts. Moreover, a further one sixth of dividends over the time periods came from the healthcare sector, principally AstraZeneca and GlaxoSmithKline. 

Justin Cooper, chief executive of Link Market Services, part of Link Asset Services, says: ‘Dividend growth in the first quarter was a bit disappointing when excluding one-offs. Investors shouldn’t be worried, however. If you take exchange rates out of the picture, dividend growth will continue in 2018 only a little slower than last year. In sterling terms, of course, it’s going to feel much less exciting. 

‘As the dollar has steadily weakened, so all those dividends that will be paid this year will attract a much less favourable exchange rate. This year’s exchange rate roundabouts will be a lot less fun than last year’s swings. Even so, we still expect UK payouts to breach another new record.’ 

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