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FTSE dividends suffer as dollar languishes

Dollar's 10% fall against the pound over the last year knocks first quarter dividends from companies reporting in the currency.

 
FTSE dividends suffer as dollar languishes
 

The weaker dollar is eating away at UK investors' dividend income, according to the latest UK Dividend Monitor report from fund administrators Link Asset Services.

The report revealed the impact of the exchange rate penalty from a sharply weaker dollar, the currency in which more than two-fifths of first quarter dividends were paid.

FTSE 100 and FTSE 250 dividends reached £16.7 billion in the first three months of the year, a 7.6% increase year-on-year that was distorted by a £1 billion fillip from British American Tobacco (BATS), which moved to quarterly payouts as part of its takeover of US tobacco firm Reynolds.

The long-promised pre-takeover special dividend from broadcaster Sky (SKY) – the first distribution since its acquisitions – was also paid.

However, with the BAT payment stripped out, growth was far less impressive with dividends rising just 1.2% year-on-year. With special dividends also excluded, dividends actually dipped 0.1%.

BP and Shell won't budge

The slowdown was attributed to a lack of dividend growth from some of the largest payers, which typically dominate first quarter dividend payments, especially in the oil and pharmaceutical sectors.

Almost a quarter of first quarter dividends are paid by the oil majors BP (BP) and Royal Dutch Shell (RDSb). Although higher oil prices have not yet let to higher dividend payouts, both oil giants had maintained their income payments through the oil slump and are not now increasing as the picture becomes more stable.

Unfortunately for investors, once a stronger pound was factored in, the income received was 15.3% lower year-on-year from the oil sector.

A strong pound also hit the payments made by pharmaceutical behemoths. AstraZeneca’s (AZN) US dollar accounting means the sterling payout was sharply lower year-on-year, pulling the sector contribution down 6%.

Cash is tight for both AstraZeneca and rival GlaxoSmithKline (GSK), with the former facing patent expirations while the latter has acquisition plans, and it is no surprise the market is scrutinising their dividend policies.

The mining sector, which pushed 2017 dividend payments to record highs, continued to perform well as the industry benefited from a stronger global economy.

Justin Cooper, chief executive of Link Market Services, said dividend growth in the first quarter was ‘a bit disappointing’ when one-offs were excluded.

‘Mergers and acquisitions activity has also proved to be double-edged sword for dividends. While Sky paid its long-awaited special dividend ahead of its likely takeover agreement with 21st Century Fox, consolidation has depressed dividends by a number of mid-cap firms,’ he said.  

But Cooper said dividends were still expected to rise this year, with the payouts offering welcome respite from the volatility of share prices.

'The stock market recently reminded investors that volatility is the norm for share prices, not the exception,' he said.

'When markets become this choppy, it’s well worth remembering that profits continue to be made, and dividends continue to be paid, and that, over the long term, dividends constitute the lion’s share of an investor’s returns.'

Supermarkets and banks to buck trend?

Stephen Message, manager of the £252 million Legal & General UK Equity Income fund, acknowledged the threat posed to UK dividends from the dollar's weakness, but pointed to the banking and food retail sectors as potential areas where payouts could grow.

'It is now a decade on from the financial crisis where a key priority for banks has been to increase capital levels to withstand any future shocks,' he said.

'With capital levels rebuilt and risks over fines for misconduct gradually receding, combined with a rising interest rate environment, this should pave the way for an increased focus on dividends.'

Message holds both Lloyds (LLOY) and Barclays (BARC) in his fund.

The manager added that supermarkets, like his holdings Tesco (TSCO) and Morrisons (MRW), were now responding to the challenge posed by discounters like Aldi and Lidl.

'Some of the larger operators are seeking to address recent issues through merger activity or by increasing exposure to other channels such as food wholesale in order to increase revenues,' he said.

'We are also taking a slightly more optimistic view on the outlook for consumer incomes, given that we expect real wages to rise as inflation pressure recede following the recent rise in sterling.'

Top 15 dividend payers in the first quarter

Rank Company
1 Royal Dutch Shell (RDSb)
2 AstraZeneca (AZN)
3 BP (BP)
4 Vodafone (VOD)
5 British American Tobacco (BATS)
Sub-total £7.8 billion
% of total dividends 47%
6 GlaxoSmithKline (GSK)
7 BHP Billiton (BLT)
8 Imperial Brands (IMB)
9 National Grid (NG)
10 BT (BT)
11 Unilever (ULVR)
12 Persimmon (PSN)
13 Compass (CPG)
14 Evraz (EVRE)
15 SSE (SSE)
Sub-total £5.1 billion
Top 15 total £12.9 billion
% of total dividends 77%

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