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UK dividends drop behind the rest of the developed world: Where should income investors look?

22 August 2016

The Henderson Global Dividend Index highlights the lacklustre second quarter that UK equity income investors have had to endure.

By Gary Jackson,

Editor, FE Trustnet

Dividends from UK companies are falling behind those being paid in other parts of the world, according to research by Henderson Global Investors, as dividend cuts continue to impact the sector.

The latest edition of the Henderson Global Dividend Index found that the second quarter of 2016 witnessed a 2.3 per cent rise in global dividends, on a headline basis. This means total payouts reached $421.6bn across the three-month period, representing a $9.7bn year-on-year increase.

On an underlying basis, dividends were up 1.2 per cent during the quarter. This was slower underlying growth than the 3.1 per cent rise seen in the first quarter of the year, partly reflected seasonal patterns that give greater weight to slower growing parts of the world in the second quarter.

When the UK’s payouts are viewed on a headline basis they look encouraging with their 7.7 per cent increase to a total of $33.7bn.

Performance of Henderson Global Dividend Index by region

 

Source: Henderson Global Investors

However, the rise was down to the 14 per cent jump in special dividends – which was driven by bumper payouts from the likes of GlaxoSmithKline and Intercontinental Hotels. When these special dividends are stripped out, however, a different picture emerges.

On an underlying basis, UK dividends dropped by 3.3 per cent year-on-year in the second quarter. A major contributor was the cuts undertaken by companies such as Standard Chartered, Anglo American, Barclays and Morrison taking effect.

What’s more, the fact that profit growth remains muted in the UK limits the scope for other companies to lift their dividends, while the impact of the vote to quit the European Union may start to be felt later in the year.


Alex Crooke, head of global equity income at Henderson Global Investors, said: “Profit growth remains under pressure in the UK, limiting the potential for companies to increase dividends. Moreover, since the UK’s decision to leave the EU at the end of June, the pound has fallen further on the foreign exchange markets, extending a descent that began in the months running up to the referendum.”

“For overseas investors, that means UK dividends will be worth sharply less, though with many of the UK’s largest companies paying their dividends in dollars, the impact will be less severe than the pound’s devaluation might suggest. What’s more, UK dividends only make up 10 per cent of the global total, so global investors need not be too concerned about their overall portfolio.”

“For UK-based investors, of course, the much weaker pound means dividend income coming from abroad is suddenly worth a lot more. Looking globally for income has not only provided UK investors with the opportunity to invest from a larger selection of companies with faster growing dividends than the UK can muster at present, it has also protected them in the short term from the impact of the Brexit vote.”

 

Source: Henderson Global Investors

During the second quarter of the year, North America, Europe and Asia-Pacific ex Japan witnessed the largest rises in dividend payouts while emerging markets and Japan joined the UK as laggards. The Henderson Global Dividend Index reached 161.0 points at the close of the three-month period, which is its highest level since the end of 2014.

Crooke highlights Europe as one area of the global market that is showing “encouraging growth” after the second quarter. More than 80 per cent of Europe’s 2016 dividends have now been paid and the trends displayed thus far seem to suggest opportunities for income investors.


“European dividends of $140.2bn made up two-fifths of the global second-quarter total. They were 1.1 per cent higher than Q2 2015 on a headline basis. Underlying growth was an impressive 4.1 per cent, once lower special dividends, particularly in France and Denmark, as well as other lesser factors were taken into account,” Henderson’s report said.

“Growth rates varied significantly across the region, with the financial sector showing particular divergence. French and Dutch banks delivered big increases, while those in Germany, Spain and Belgium made deep cuts.”

Performance of Europe ex UK vs Henderson Global Dividend Index

 

Source: Henderson Global Investors

When it comes to the Netherlands, which posted the fastest growth rate in Europe, underlying growth of 28.3 per cent (43 per cent growth on a headline level) was second only to the increases made in South Korea. Every Dutch compared in the Henderson Global Dividend Index lifted its payout in the quarter although the lion’s share came from ING.

In France, there was underlying growth of 11.2 per cent – making it the third fastest growing in the world. Almost nine in 10 French companies increased their payouts or held them steady with the banks continuing to make grounds in rebuilding dividends after the financial crisis; however, a wide range of French sectors gave income investors good news over the quarter.

The US, on the other hand, posted its slowest underlying rate of growth since 2013 at 4.6 per cent. This reflects the country’s subdued profit growth, which is partly down to the strong dollar.

A number of US sectors, including transport and industrials, showed lacklustre dividend growth in comparison to recent times. In addition, the energy and mining sectors continued to see declines, along with cuts from companies that supply the oil industry with equipment.

Henderson says that this US slowdown, which started in late 2015, should be viewed as a normalisation to more sustainable levels of dividend growth following several quarters of double-digit gains.

Crooke said: “The shifting fortunes of different parts of the world highlight the value of taking a global approach to income investing. As the US engine of global dividends is slowing down, so Europe is showing encouraging growth.”

With this in mind, FE Trustnet will take a closer look at international equity income funds that have earned some of the best ratings from investment analysts.

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