Weak pound to boost UK dividends in 2017

Income investors can breathe a sigh of relief as the dividend outlook for the UK market is expected to be rosy in 2017, thanks to the weak pound.

Capita Asset Services, which produces a quarterly report on the state of the UK dividend market, expects dividend growth to come in 7.5 per cent higher than in 2016, which the firm notes will represent a ‘healthy increase’.

But a look under the bonnet shows the windfall for income investors does not stem from improved fundamentals, such as an improvement in profit growth. Instead two thirds of the 7.5 per cent figure will come from the effect of the weak pound.

Indeed, the plunging pound also positively masked dividend growth in 2016, with Capita noting that of the £5.2 billion increase in dividends for the year (which worked out 6.6 per cent higher compared to 2015) the vast majority - £4.8 billion - was due to the pound’s weakness. Special dividends, payments made outside the ordinary cycle, also helped boosted the headline total.

The underlying total (excluding special dividends) for the UK market rose 2.6 per cent for the full year, reaching £78.5 billion. Without the exchange rate gains, underlying dividends would only have reached £73.7 billion, or in other words it would be 3.7 per cent lower year-on-year.

The sharp depreciation in sterling following the 'leave' vote is a silver lining for income investors, as around 40 per cent of UK companies pay dividends in either dollars or euros.

These companies tend to be the big income heavyweights such as Vodafone and BP, who both declare in dollars, in turn boosting overall dividends for UK companies. In contrast, the more domestically focused businesses, which usually reside in the FTSE 250 index, typically pay their dividends in sterling.

Capita notes that 2016 marked the third consecutive year when the blue chip names in the FTSE 100 have posted slower underlying dividend growth versus the FTSE 250 index.

Justin Cooper, chief executive of Shareholder Solutions, part of Capita Asset Services, said a combination of the second-largest haul of special dividends on record and the added alchemy of huge exchange rate gains following the pound’s devaluation in the summer ultimately turned a rather leaden year golden.

He added: ‘There are still uncertainties ahead in 2017. A new US president will bring new fiscal and trade policies, while the UK’s intention to trigger Article 50 has the potential to cause further volatility in the pound.

‘Nevertheless, economic growth is holding up in the UK, improving in Europe, and may take off in America. Commodity prices are climbing back, providing relief for oil and mining firms. We should also see some of those companies that cancelled dividends in recent years reinstate them.

‘However, investors will also be looking for improving profitability from companies, and for this to feed through into underlying dividends, so that improving payouts are more sustainable and less dependent on currency gains.’

- UK dividends fall behind the rest of the world

Dividend performance was mixed across sectors. Mining dividends halved year-on-year to £3.3 billion, their worst showing since 2009. Elsewhere, consumer goods, the only sector to increase payouts every year since 2007, upped dividends by 5.1 per cent to £11.8 billion. Financials, the group which pays the most dividends, raised payouts by 7.8 per cent to £20.3 billion, boosted by a hike from HSBC and specials from Prudential and Lloyds.

Overall, 26 sectors out of 39 paid out more in 2016 than in 2015, somewhat below the average of 32 since the financial crisis.

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