UK companies paid their shareholders a headline GBP97.4bn in 2014, 21.0% higher than 2013, although underlying growth was much less impressive, according to the latest UK Dividend Monitor from Capita Asset Services.
Headline dividends narrowly exceeded Capita’s forecast of GBP97.1bn, on the back of stronger special dividends for the year, which totalled GBP18.3bn. The vast majority was down to Vodafone record special paid in the first quarter, a GBP15.9bn single payment.
However, on an underlying basis, growth stalled. Excluding special dividends, dividends totalled GBP79.1bn, an increase of just 1.4% – a real terms decline, and in line with Capita’s forecast of GBP79.2bn. Just 2009 and 2010 have performed worse on Capita’s records, following the effects of a global recession. Investors’ returns have been hampered by struggling profits among UK plc, particularly the biggest most international ones, and by currency effects. Without the drag of the strong pound, underlying dividends would have been approximately GBP2.5bn higher, a modest but creditable growth rate of 4.6%.
The final quarter of the year provided more reassuring underlying growth for investors. While headline dividends were slightly down (-0.4% to GBP15.2bn) thanks to fewer special dividends, underlying growth stood at 4.0%, the fastest rate of increase since Q3 2013. This was triggered by sharp rise of the US dollar against the pound, reversing some the negative effects of the strong pound earlier in the year, and accounting for half of the growth in the quarter.
Capita has increased its 2015 forecast for headline dividends to GBP86.1bn (with a slightly higher run rate of special dividends), but the effect of Tesco’s cancellation of its GBP900m final dividend means the underlying forecast is slightly lower, at GBP83.6bn, an increase of 5.7% compared to 2014. This also allows for the fact that that Vodafone, formerly a top 3 UK payer, is now a much smaller company and likely to drop to fifth place in the rankings in 2015. Stripping out these two factors, Capita predicts growth can top 7% in 2015, thanks in large part to a resurgent dollar. The Eurozone will be an ongoing concern, especially if the euro devalues. UK plc dividends have some sensitivity to the euro, with around 2% of dividends denominated in euros – and one of the top 20 payers, Unilever, reporting in the currency.
On a sector level, Tesco’s cancellation of its 2015 final dividend bucked the trend among consumer services firms, the standout performers of 2014. General retailers and travel firms, buoyed by increased consumer spending power, offset sharply lower dividends from the struggling supermarket sector. Supermarkets will continue to struggle this year. Tesco’s move will cost investors over GBP900m in 2015, and as result, even if it pays an interim dividend, the company, UK’s 19th largest dividend payer in 2014, is unlikely to make it into the UK’s top 300 payers this year. However, the worst performers overall were commodities companies. Mining firms slashed their payouts 8%, while oil and gas producers cut theirs 1%.
Large-cap companies generally disappointed in 2014, with underlying payouts from the FTSE 100 up just 0.7% on 2013 to GBP70.0bn. Payouts from mid-caps – who are less exposed to global economic and currency issues – posted growth more than ten times as strong (+8.0%).
The prospective 12 month yield on the UK market is steady at 3.9%. While cash and property yields have not moved since the last quarter, 10-year gilt yields have fallen to 1.6% from 2.45% last quarter. This sharp decline increases the attractiveness of equities for income investors who are prepared to look beyond the volatility in share prices.
Justin Cooper, chief executive of Shareholder solutions, part of Capita Asset Services, says: “2014 saw a record year for dividend payouts, but Vodafone’s special dividend masked stalling growth. Under the bonnet, things did not run as smoothly as the headlines suggest. Sluggish profit growth, a spluttering global economy, and the strength of sterling in the early part of the year conspired to put the brakes on underlying growth.
“The year ahead should provide more reason for optimism among income investors. Certainly, the supermarket sector is under pressure, which has seen Tesco pull its dividend, and global growth is far from secure. Very few UK companies report in euros, so the continuing fall in that currency's value will have little direct impact, though UK firms who do business with Europe will find profitability squeezed which will slow dividend growth. On the positive side, 40% of UK dividends are paid by companies reporting in dollars, so the surging greenback is by far the biggest factor, and will boost payouts, accounting for as much as half the growth we expect from FTSE 100 dividends at current exchange rates. UK income investors are very dependent on the giant oil companies, but given their historic performance when oil prices fall to this level, we don’t anticipate they will reduce payouts. However, a lower oil price will prove good news for many listed UK companies, and in turn, investors, helping growth elsewhere in the market.”
