Record dividends during the second quarter has prompted Capita Asset Services to raise forecasts for full-year payouts of £90.6bn, despite a “much quieter” forecast for the second half of the year.
Payouts reached an all-time record of £33.3bn during the second quarter of the year thanks to what Capita described as “robust underlying growth, high special dividends, and large FX gains”.
According to the firm, the 14.5 per cent year-on-year increase was the fastest in more than three years, reflecting “very healthy underlying growth, topped up with a substantial boost from the weak pound, plus a large haul of special dividends”.
UK dividend growth
Source: Capita Asset Services
Weakness in sterling has had a big impact on the importance of overseas earnings. Since last year’s referendum sterling has fallen by 12.38 per cent against the euro and by 11.63 per cent against the dollar, to 16 July 2017.
Justin Cooper, chief executive of shareholder solutions at Capita Asset Services, said: “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.”
Along with foreign currency exchange, special dividends were the main drivers of record payouts during the second quarter.
Special payouts of £4.6bn were the second-highest on record for any quarter and was due largely to a £3.2bn payment from National Grid on the sale of its 61 per cent stake in its UK gas distribution business.
As well as National Grid, Lloyds Bank also announced a £357m special dividend during the quarter while broadcaster ITV and Intercontinental Hotels made one-off payments.
On a sector basis, mining companies saw a big rise in payouts during the second quarter, while the financial sector largest dividend-paying sector.
According to Capita, every company in the mining sector raised their dividends, although Glencore and Rio Tinto were the biggest contributors.
Glencore restarted dividends for the first time since 2015, with its £390m higher than anticipated. Meanwhile, Rio Tinto’s payout increased by almost £400m year-on-year, and was well ahead of the minimum level indicated by the firm.
Despite the big payouts by miners, dividends from banks and financial companies were higher, totalling £10.3bn as the chart below shows, although there were cuts by firms in the broad sector.
Dividends by sector in Q2
Source: Capita Asset Services
Capita further noted that every company in the consumer goods and housebuilder grouping increased their payouts, although the total for the retail and consumer services group fell year-on-year.
“Elsewhere, a large increase in oil dividends was mainly due to the weaker pound, while the fall from the healthcare and pharmaceutical group was because GlaxoSmithKline did not repeat its special dividend this year,” it added. “Overall, 12 sectors out of 17 paid more in Q2 this year than last.”
By market capitalisation there was little difference between the mid-cap stocks and those in the top 100. Both showed similar rates of dividend growth during the second quarter, rising by 12.2 per cent and 12.8 per cent respectively.
With a bumper Q2 now behind it, Capita Asset Services forecasts full-year dividends of £90.6bn, surpassing the record of £88.1bn of 2014 and a 7 per cent increase on last year’s £84.7bn total. However, the outlook for the rest of the year is more subdued.
Cooper said “Even though the second half is going to be much quieter, investors can look forward to dividends hitting a new record this year.”
He added: “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.”
In 2017, Capita had forecast faster underlying dividend growth, stronger performance for mid-cap stocks, a sharp reduction in exchange rate gains in the second half, and lower special dividends. It noted that the first three expectations had developed in the way they had expected, albeit at a “slightly faster pace”.
However, equities are likely to be the best yielding asset class for the coming months.
Source: Capita Asset Services
“The prospective yield over the next twelve months rose fractionally to 3.7 per cent over the course of the quarter, as share prices trod water while dividend growth accelerated,” Capita noted.
“The top 100 will yield 3.8 per cent, while the mid-caps 250 index will yield 2.6 per cent, excluding the effect of any special dividends that may get paid in the future.
“The UK 10-year bond yield returned back up to 1.3 per cent, while instant access savings rates rose again, reaching 1.25 per cent.
“Property yielded 2.9 per cent after running costs associated with residential lettings, up slightly over the period. Despite these increases, equity yields stayed well ahead of other asset classes in the first quarter.”