Blog : BOARD TALK
|Posted on April 24, 2017 at 12:15 PM|
Dividends. It might be time to start thinking about them in a wider context for UK plc. Hint: think pensions at the same time.
2017 saw a brisk start for UK dividends, according to the latest UK Dividend Monitor from Capita Asset Services, which provides infrastructure, services and expertise to clients across the capital markets.
The headline figures are impressive, but growth was rather narrowly based, it says. It depended heavily on large exchange rate gains, and a stronger-than-expected rebound in BHP Billiton’s pay out. Meanwhile, a steep decline in special dividends took the shine off the headline rate.
Overall, UK dividends rose 9.5% year-on-year in the first quarter on a headline basis. The £15.4bn total came despite a 90% decline in special dividends to just £110m, their weakest quarter in almost six years. After the huge haul of specials in 2016, a normalisation this year was on the cards. Even so, the fall in the first quarter was twice as large as Capita had pencilled in, and knocked five percentage points off the headline growth rate.
The data shows that exchange rate factors easily offset the special-dividend effect. The first quarter is the most heavily skewed towards dividends declared in foreign currencies, accounting for three-fifths of the total distributed, compared to a little over two-fifths for the year as a whole. The pound’s weakness yields exchange rate gains when UK multinational profits earned overseas are repatriated and paid out in dividends, says Capita.
Over the quarter, exchange rate gains added £1.7bn to the total, equivalent to an astonishing 12 percentage points on the headline growth rate. (my emphasis)
BHP Billiton, which had cut its dividend deeply in 2016, single-handedly accounted for 3.5 percentage points of the headline growth rate.
So....on an underlying basis, which excludes special dividends, the year-on-year increase was a dramatic16.2%, taking underlying dividends to a first quarter record of £15.3bn.
"Without the combined effect of foreign exchange movements, and the unexpectedly large boost from BHP Billiton, however, underlying dividends would have fallen slightly year-on-year, indicating that sustained, core growth is still hard to come by" says Capita (my emphasis).
Of the main industry groupings, oil, gas and energy, resources and commodities, consumer goods & housebuilding, and telecoms performed best. Retail & consumer services and healthcare & pharmaceuticals fell, mainly owing to lower special dividends. At the more detailed sector level, 11 sectors out of 17 paid more in Q1 this year than last.
Source: Capita Asset Services - London
With grateful thanks to Exchange Data International for providing the raw data April 24, 2017
Capita Asset Services expects underlying dividends to rise 7.7% to £84.6bn this year, with three quarters of that growth coming from sterling’s weakness. This is based on the assumption that exchange rates do not change. Headline dividends will rise only 2.8% to £87.1bn. This is £0.4bn lower than Capita’s earlier forecast, owing to the weaker-than-expected special dividends in the first quarter.
“UK plc delivered a record for a first quarter, at least before the big drop in special dividends was accounted for. But the sugar rush of exchange rate gains won’t leave investors feeling satisfied for long. It’s going to wear off quickly in the third quarter, unless there is a second leg downwards in the pound. That cash is of course real, at least in sterling terms, but only long-term profit growth can deliver sustainable increases in the income from shares. Unfortunately, profit growth has been rather meagre from UK plc of late" said Justin Cooper, Chief Executive of Shareholder solutions, part of Capita Asset Services.
It might be interesting to overlay this information with the statistics on UK plc pension deficits. As I wrote last year on Forbes, It's About My Pension, Stupid - Pensions Are A Corporate Governance Issue. Pension schemes in deficit and rising dividends should pose challenging questions in boardrooms.
Earlier this month - as covered here on Board Talk - research from JLT Employee Benefits , one of the UK's leading pension and employee benefit consultancies found that 23 FTSE 250 companies would need a payment of more than two years’ dividends in order to settle their defined benefit (DB) pension deficits in full, which is worth £4.7bn collectively.
Pethaps it's time we said "dividends, but..." instead of just shouting DIVIDENDS.