Amid the reassuring trend of a recovery in share prices from that January swoon come dark warnings of troubled times ahead for income-orientated private investors: cuts in company dividend payouts.
The threat to dividends has been has been masked so far by the fall in sterling and a series of special “one-off” dividend payments. But income investors now face a more difficult time.
According to the Capita UK Dividend Monitor, UK dividends from FTSE 100 and FTSE 250 companies rose by 6.4 per cent in the first three months of the year. The rise was powered by a series of “special” dividends, including £380 million paid to investors in Al Noor Hospitals after its acquisition by Mediclinic and £307m from chemicals group Johnson Matthey. Retailer Next chipped in with a 60p per share special, while a 18.4p special from specialist insurer Beazley also boosted dividends.
Stripping out the effect of these special payments, underlying dividends still rose 1.3 per cent in the first quarter, lifted by the fall in the pound. The currency was down 5.7 per cent against the dollar since the start of the year, weakened by poor trade figures and uncertainty over the forthcoming referendum on the UK’s membership of the European Union. This weakness, says Capita, helped boost the £6.1 billion of dividends over the quarter declared in dollars.
UK equities are expected to yield on average 3.6 per cent over the next 12 months. But Capita has forecast the weakest year since 2010 for UK dividend growth, expecting total a payout for 2016 of £78bn. This would be down 1.5 per cent on the 2015 total, which in turn was a fall of 10 per cent on 2014. Dividend payouts peaked at £88bn that year, boosted by a special payment from Vodafone.
Now the silver lining in this cloud is that we are not experiencing an overall, across-the-board cut in dividend payments by hundreds of companies. Thirty five stock sectors saw dividends rise in the first quarter of 2016, compared to four – mining, industrial metals, tobacco and food retail where dividend reductions were concentrated.
Royal Dutch Shell was the exception in the energy sector, with the announcement of a £1.4bn total pay-out for the year following its acquisition of BG Group. Shell will be responsible for every £1 in £7.50 paid out in dividends in 2016.
Imperial Brands will also be issuing higher dividends due to an acquisition of tobacco brands in the US. The biggest payers this year are likely to be Vodafone, BP, Shell, AstraZeneca and GlaxoSmithKline – all widely held in income portfolios. These top five account for 53 per cent of payouts in the first quarter, a total of £7.5bn.
However, Justin Cooper of Capita points out that since the firm’s January report, BHP, Rio Tinto, Barclays, Rolls-Royce and Morrisons have joined Glencore, Standard Chartered and Anglo American in cutting their dividends in 2016. “Together”, he says, “they will knock some hefty bricks out the of dividend wall this year.” The cuts are expected to amount to a loss of £2.7bn in pay-outs, and will filter through to shareholders later this year.
Says Cooper, ““It’s obviously disappointing to see UK dividends in decline this year, but investors should not to be too gloomy. The cuts are focused in a handful of large sectors, and so are relatively easy to avoid. If anything the risks are now finally on the upside. We are unlikely to see much more in the way of big cuts.”
It’s been hailed, by those who should know better, a “shareholder spring”. Mining giant Anglo American faced an investor revolt at the annual meeting last week over the £3.4m pay package for its chief executive, Mark Cutifani. It followed even bigger revolts at BP where almost 60 per cent of shareholders rejected a £14m pay package for its chief executive, Bob Dudley, after a year of record losses and thousands of job cuts.
But far from being a new phenomenon, revolts over boardroom pay have been a recurring feature of corporate life since the mid-1980s: not even a “rite of spring” but more an all-seasons cri de coeur.
Private shareholders, having made most of the running 30 years ago when institutional shareholders stood on the sidelines or looked the other way, have long since given up. The FTSE 100 giants are overwhelmingly owned by overseas investors, pension and fund management companies, but the private shareholder can at least take some pride in having led the way. A long overdue rebellion now by the big battalions is at least an improvement on endless acquiescence.