Income Investors: Prepare for Cuts

Dividend payouts from UK stocks rose in the first three months of the year thanks to currency weakness - but Capita's Dividend Monitor warns of a £2.7 billion cut later in the year

Emma Wall 18 April, 2016 | 4:22PM
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Income investors have benefitted from a £14.2 billion windfall year to date – but the latest Dividend Monitor from Capita suggests shareholder should enjoy their pay-out while they can as it’s downhill from here.

Dividends were up 6.4% in the three months to the end of March, but this figure was boosted significantly by special dividends, while underlying growth amounted to just 1.3% – and even this was only due to a weakened pound, which added £350 million to the total of £13.2 billion. Currency fluctuations are important driver of UK dividends as so many companies pay out in US dollars; £6.1 billion this quarter.

UK equities are expected to yield on average 3.6% over the next 12 months. Capita has forecast the weakest year since 2010 for UK dividend growth, expecting total a pay-out for 2016 of £78 billion, this is a fall of 1.5% on the 2015 total, which in turn was a fall of 10% on 2014. Dividend pay-outs peaked at £88 billion in 2014, boosted by a special payment from Vodafone (VOD).

Reasons to Be Cheerful

Thirty five stock sectors saw dividends rise in the first quarter of 2016, compared to four – mining, industrial metals, tobacco and food retail – which cut pay-outs. Shell (RDSB) was a particular success and has announced a £1.4 billion total pay-out for the year thanks to its acquisition of BG Group. Shell will be responsible for every £1 in £7.50 paid out in dividends in 2016.

Imperial Brands (IMB) will also issuing higher dividends due to an acquisition, in this case of a portfolio of tobacco brands in the US. The biggest payers of 2016 are expected to be Vodafone, BP (BP.), Shell, AstraZeneca (AZN) and GlaxoSmithKline (GSK). The top five account for 53% of pay-outs in the first quarter, a total of £7.5 billion.

Prepare for Cuts Hitting Later this Year

“Since our January report, BHP, Rio Tinto, Barclays, Rolls Royce and Morrison have joined Glencore, Standard Chartered and Anglo American in cutting their dividends in 2016,” said Justin Cooper of Capita. “Together they will knock some hefty bricks out the of dividend wall this year.”

The cuts are expected to amount to a loss of £2.7 billion in pay-outs, and will filter through to shareholders later this year.

The basic materials sector has seen the deepest cuts to dividends as companies take the hit of underlying commodity price falls. The sector has seen a 43% fall in dividends year on year. Consumer goods companies have also cut dividends, down 20% year on year.

“It’s obviously disappointing to see UK dividends in decline this year, but investors should not to be too gloomy,” cheers Cooper. “The cuts are focused in a handful of large sectors, and so are relatively easy to avoid. If anything the risks are now finally on the upside. We are unlikely to see much more in the way of big cuts.”

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.

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About Author

Emma Wall  is former Senior International Editor for Morningstar