Skip to the content

Capita: Dividends set to grow in 2015 but stalwarts will disappoint

26 January 2015

Capita predicts growth in regular dividends this year but a number of managers also reveal where they see greatest risks.

By Daniel Lanyon,

Reporter, FE Trustnet

The year ahead will be a cheerful one for investors in UK equities with dividends growing faster than in 2014, according to Capita Asset Services' latest Dividend Monitor, which also warns total dividends paid out will fall due a lower nominal amount of special dividends.

Company dividends, most often in blue chip names, have been an increasingly important component of income investors’ portfolios with yields from cash and bonds becoming increasingly unattractive.

Last year was one of the best 12 months for dividend hungry investors in UK equities, with a substantial uplift in total dividends paid-out to shareholders. However, £16.7bn of the total £97.4bn paid out by companies came from the Vodafone’s special dividend following its sale of its Verizon business with growth in underlying dividends marginal.

Investors’ returns have been hampered by struggling profits among UK firms, particularly the biggest most international businesses, and by currency effects, the report said. Discounting the strong pound, underlying dividends would have been approximately £2.5bn higher it added.

Capita’s Justin Cooper (pictured) said: “2014 saw a record year for dividend pay-outs, but Vodafone’s special dividend masked stalling growth.”

“Under the bonnet, things did not run as smoothly as the headlines suggest. Sluggish profit growth, a spluttering global economy, and the strength of sterling in the early part of the year conspired to put the brakes on underlying growth.”

However, he says the year ahead should provide more reason for optimism among income investors as, according to the report; headline dividends in 2015 should be 5.7 per cent greater than they were last year.

Adam Avigdori, co-manager of the £341m BlackRock UK Income fund also says he expects to continue to see the dividend growth in the UK Equity market.

“This is all the more welcome given the extremely low yields that can now be found in many asset classes. The UK equity market now yields 3.5 per cent which compares favourably to the UK 10 year government bond at 1.5 per cent whilst savers would be lucky to get more than 1 per cent in a cash deposit account,” he said.

“Increasingly, more companies are recognising the value of dividends as part of providing total returns to shareholders. Since the financial crisis in 2008, dividends in the UK market have risen nearly 50 per cent. We welcome this trend and continue to encourage all management teams, where possible, to improve the visibility of returns to shareholders through dividends.”

An FE Trustnet study last year revealed that Avigdori’s Blackrock UK Income fund was one of only two portfolios in the IA UK Equity Income sector – the other being Trojan Income – to have grown its dividend in each of the last seven years.

One area where Capita are not so bullish is the major supermarkets, which were once considered income- defensive stocks due to resilience even when markets are weak. However, major disruption in the sector with the rise of discounters such as Aldi and Lidl has hit both profits and share prices

“Certainly, the supermarket sector is under pressure, which has seen Tesco pull its dividend, and global growth is far from secure.”


According to FE Analytics, Tesco is down 25.05 per cent, Sainsbury’s 21.02 per cent and Morrisons 12.44 per cent over the past year while the FTSE All Share has gained 4.55 per cent.

Performance of stocks and index over 1yr

   
Source: FE Analytics

Nicla Di Palma equity analyst at Brewin Dolphin also says dividends aren’t safe at any of the UK supermarkets.

“At Tesco, Mr Lewis [the supermarket’s chief exec] cut the dividend by 75 per cent and the final dividend was cancelled. This year, shareholders will receive a dividend which is 92 per cent lower than what they received last year. We believe Mr Lewis might leave the interim dividend unchanged from 2014: this is a nominal amount and we do not believe investors will see significant growth in their Tesco dividend for a few years,” he said

“At Sainsbury, at the strategy presentation held in November 2014, management announced that it would fix dividend cover at 2 times underlying earnings, dividend cover was 1.84 times in 2013/14. As underlying EPS [earnings per share] is likely to fall both this year and in 2015/16, we expect a cut in dividend of about 20 per cent this year and 10 per cent next year.”
 
“Finally, at Morrison, CEO Dalton Philips promised investors a 5 per cent increase in dividend this year. Mr Philips will be leaving the company in March and we expect a new CEO to cut the dividend - the uncertainty is by how much - to invest in the customer offer.”

Eric Moore, co-manager of the £200m Miton Income fund alongside Gervais Williams is most worried about two popular stocks among income investors.

“Centrica is a probable cut contender. The weakness in the oil price means reduced earnings from their upstream business, which normally would be offset by improving profits in British Gas Residential.  Standard Chartered is also a possible cutter. After a decade of very aggressive loan growth, bad debt charges are beginning to pick up.

The two stocks have also had a tough year with Centrica down 11.52 per cent and Standard Chartered down 26.1 per cent.

Performance of stocks and index over 1yr

 

Source: FE Analytics

Centrica is held by 24 funds in the Investment Association as a top 10 holding with some of most notable including the £2bn Trojan Income fund, £1.6bn Artemis High Income fund, £944m Aviva UK Equity Income fund, £282m JOHCM UK Dynamic fund, £4.4bn Newton Global Higher Income fund and £1.5bn Schroder Income fund.


FE Alpha Manager Neil Woodford is another of Centrica’s notable backers, though the stock currently resides just outside of his CF Woodford Equity Income fund’s list of top 10 holdings.

Standard Chartered, meanwhile, is a top 10 holding with 22 funds in the IA universe. They include Invesco Perpetual Global Opportunities, Standard Life Investments Global Advantages and Standard Life Investments UK Equity High Alpha.

The Capita report highlighted that last year’s flattish performance in regular dividends was partly a cause of the currency. However, the report expects that trend to reverse.

“One big positive driver for the whole UK equity dividend outlook is the weakness of the pound, or more accurately the strength of the US dollar.”

“About 40 per cent of the market’s dividends are declared in US dollars so even an unchanged US dollar dividend paid this January is worth 6 per cent more to a Sterling based investor.”

“Very few UK companies report in euros, so the continuing fall in that currency's value will have little direct impact, though UK firms who do business with Europe will find profitability squeezed which will slow dividend growth.”


ALT_TAG

Editor's Picks

Loading...

Videos from BNY Mellon Investment Management

Loading...

Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.