Bumper growth in returns
‘Knockout’ year as investors enjoy record dividends
UK dividends hit an all-time record of £33.3 billion in the second quarter of 2017, according to the latest data.
The 14.5% increase was the fastest in more than three years and shareholders will enjoy a record return for the full year, says the forecast.
The rise was a result of a number of factors converging at one time: healthy underlying growth, topped up with a substantial boost from the weak pound, plus a large haul of special dividends, says the Dividend Monitor from Capita Asset Service.
Special payouts of £4.6bn were the second-highest on record for any quarter, owing mainly to a £3.2bn payment from National Grid on the sale of its 61% stake in its UK gas distribution business.
More cash will find its way to National Grid’s shareholders by way of a share buy-back.
Meanwhile, Lloyds Bank, now enjoying surging profits, paid £357 million as a special, on top of a £1.2bn regular dividend. Twenty companies paid specials, the second-highest number in any quarter on record.
Underlying dividends (which exclude specials) reached £28.6bn, also a comfortable record, increasing 12.6% year-on-year.
A little under five percentage points of this increase came from the effect of the weaker pound translating dollar and euro dividends at a more favourable exchange rate; one-third of the total distributed in the second quarter was declared in US dollars, with euros accounting for a small fraction more.
That effect added up to £1.2bn in the second quarter. On a constant-currency basis, underlying growth was nevertheless an impressive 7.8%, the fastest increase in two years.
Growth was particularly strong in the resurgent mining sector, where every company raised payouts, though Glencore and Rio Tinto made an especially large contribution to growth. In the consumer goods and housebuilder grouping, every company also increased its payout.
The largest sector, financials, grew its dividends, but more slowly than the average. This despite a very generous payout from Lloyds Bank.
On an underlying basis, the increase from mid-cap and top 100 companies was very similar in the second quarter, up 12.2% and 12.8% respectively, but on a constant-currency basis, the mid-caps outpaced their larger rivals by about three percentage points.
The excellent second quarter means Capita Asset Services has upgraded its forecast for the year, to add in the unexpectedly high special dividends.
Despite a likely much quieter second half, thanks mainly to one-off factors and the elimination of exchange-rate effects, it now expects 2017 headline dividends (ie including specials) of £90.6bn.
This is an increase of 7.0% year-on-year, and smashes the previous record set in 2014. Capita Asset Services forecasts underlying growth (excluding specials) of 7.4%, bringing underlying dividends to a record total of £84.4bn, a very slight decrease (£200m) on its previous forecast.
The decrease reflects the removal of Sky’s final dividend pending its acquisition by Fox. On a constant-currency basis, that means underlying growth of 4.3%.
The strong outlook has pushed the prospective yield to 3.7%, up from 3.6% in April.
Justin Cooper, chief executive of Shareholder Solutions, part of Capita Asset Services said: “The gloves came off in the second quarter, as UK plc limbered up to deliver a knockout year in dividends.
“Shareholders can be thankful they had punchy special dividends and the weak pound in their corner, but improving profits have also played their part.
“Exchange rate gains have come not only for big multinationals declaring dividends in foreign currencies, but also for others with overseas operations, or export sales, supercharging their profits and so their dividends.
“The relative strength of the UK consumer, until recently at least, and surging economic growth abroad has supported stronger dividend growth than we have seen in some time. Even though the second half is going to be much quieter, investors can look forward to dividends hitting a new record this year.
“Most of the excitement for 2017 is now behind us. As we move towards 2018, the extent to which the weakening UK economy continues to diverge from improving trends elsewhere in the world will determine which companies are still able to deliver strong dividend growth. The uncertainty over the economy, the Brexit negotiations, and the unstable political situation are key factors to watch.”