Are Record UK Dividend Payments Sustainable?

UK companies will pay out £99 billion in dividends this year. But is this sustainable? Or just down to special dividends from the likes of Vodafone?

Emma Wall 22 July, 2014 | 11:47AM

This article is part of Morningstar's Guide to Investing for Income

 
 
 

Emma Wall: Hello and welcome to this 'Investing for Income Special'. I'm Emma Wall and here with me today is Jamie Forbes-Wilson, Manager of AXA Framlington Blue Chip Equity Income Fund. Hello, Jamie.

Forbes-Wilson: Hello.

Wall: So this year Capital Registrar's Dividend Monitor has predicted dividend payouts for U.K. companies to be around £99 billion, which is an incredible amount of money. The question is, is that sustainable?

Forbes-Wilson: This year has been an extraordinary year for dividends in the U.K. The payment of the special dividend by Vodafone (VOD) earlier this year, should be seen really as a one-off. It was a sale of an asset in the states which was a position where shareholders had agitated for that cash to be in the main part returned to shareholders that happened to the benefit of income seeking individuals in particular.

So while, the amount for the full year should be attractive and growth in the last year, I wouldn't necessarily see that we're going to be able to match that figure necessarily going forward. I think the underlying strength of dividend generation in the U.K. is still pretty strong. What we've seen to-date is a re-raising of shares. What we need now is a pickup in the underlying earnings of those companies, if we see that coming through, which I'm fairly confident will do, that should lead to better dividend growth on an underlying basis for the majority of the market.

Wall: You've mentioned that the Vodafone and Verizon deal is a one-off, but it does along with the pharmaceutical M&A chat signify more corporate activity. Is that something that we can expect to continue as the sort of the economies in developed markets pick up and is that positive for income investors?

Forbes-Wilson: I think generally a pickup in M&A is probably quite likely for the rest of the year. What we've had over the past couple of years is really a slowdown in the underlying CapEx of a lot of companies. What we're seeing now is an opportunity by some of the highly cash generative and cash rich businesses both here and overseas to put that cash to work in accretive deals.

So from an M&A point of view, yes, I suspect there is more to come, whether that's good for income shareholders will depend on the individual situation, I think more importantly, the underlying earnings should be beginning to improve over the second half of the year and those better earnings should translate their way through to better dividend yields.

Wall: You're one of the equity income managers who hold financial stocks. I think that one thing everyone is really interesting in when it comes to financials is when are the banks going to pay? For those that hold those individual share certificates, it's been a while since we've had any dividends from them. I mean, is that going to improve in the near future?

Forbes-Wilson: I suspect it will do over the course of the next couple of years, but there has been a clear delay in what we've received from companies like Lloyds (LLOY) which was historically a pretty big dividend payer in the U.K. market. Clearly, HSBC (HSBA) which is another very significant payer within the index continues to generate a good yield. But we bought Lloyds for the fund a year or so ago in anticipation of that dividend coming back.

We haven't seen it yet, I'm hoping that it will come back later this year. But in the meantime, other financials, some of the property companies, the life assurers, the non-life insurers have also been good generators of income and that should continue again over the next year or so.

Wall: So perhaps this is a case of investors not sort of hanging everything on that one-stop when it comes to financials.

Forbes-Wilson: No. I think the wider sector has more attractions than the banks themselves. I think the wider financial space can be a good generator of income.

Wall: Jamie, thank you very much. This is Emma Wall for Morningstar. Thank you for watching.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
AXA Framlington Blue Chip Eq Inc R £ Acc269.06 GBP-1.48
HSBC Holdings PLC659.30 GBP0.00
Lloyds Banking Group PLC57.85 GBP0.00
Vodafone Group PLC123.32 GBP0.00

About Author

Emma Wall

Emma Wall  is Web Editor for Morningstar.co.uk.

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