The devaluation of sterling following Brexit will boost dividends in 2016 by £4.3bn, but what happens in 2017 and beyond is uncertain.
This is the view of the latest Dividend Monitor from Capita Asset Services.
The boost comes from the fact that two fifths of the dividends paid by UK-listed companies are declared in dollars, or euros. This reflects the international make-up of the UK stock market. As sterling fell, post Brexit, dividend payments are being converted at a much weaker exchange rate. This, says Capital, will bring a huge boost to income investors based in the UK.
A statement from Capita said: “Top 100 share prices reacted quickly to offset the pound’s collapse, but mid-cap share prices fell as investors absorbed the likelihood that their greater exposure to the UK economy would hit their profitability .By the end of the quarter, the yield on all UK equities for the coming year held steady at 3.7%, far in excess of the income on other asset classes. UK bond yields hit new lows of 0.8% in the aftermath of the vote, while cash deposits continue to languish.”
However, it added: “Beneath the froth of special dividends, the underlying performance was less exciting. Dividends fell 2.7% year on year to £25.2bn, in line with our pre-Brexit forecast as cuts from Standard Chartered, Anglo American, Barclays and Morrison took their toll. UK plc profitability has been poor over the last couple of years. Dividends have held up much better than profits, but that means dividend cover (the ratio of profits to dividends) has fallen to very low levels. Inevitably, dividend growth is difficult to sustain in those circumstances, and this explains why the underlying picture has been weak.
“For the full year 2016, these momentous events mean Capita has upgraded its forecast for UK dividends by £4.5bn to £82.5bn, an increase of 3.8% compared to 2015. It has upgraded underlying dividends (which exclude specials) by £1.9bn to £76.9bn, an increase of 0.5% compared to 2015.”
Chief Executive of Shareholder solutions, part of Capita Asset Services Justin Cooper said: “The Brexit vote has completely changed the picture for dividends this year and beyond. The timetable for the UK’s departure from the EU, and the manner of its subsequent relationship with it, are crucial to understanding the future for income investors.”
“In the short term, investment and consumption will be depressed while the country waits for a response from the new government, and for a Brexit timetable to emerge. Dividends will suffer from any slowdown in economic growth, particularly among the UK’s mid-cap companies, though a persistently weak exchange rate will cushion sterling investors in the UK’s large multinationals.
“The longer term is difficult to predict. It depends on negotiations and implications regarding access to the single market and external trade negotiations with non-EU countries.”