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Mapping UK dividends: where the hotspots lie
by Elsa Buchanan on Apr 16, 2014 at 07:00
With the first quarter out of the way, financial information firm Markit has updated its views on 18 UK sectors for the £75 billion income payout it believes the FTSE 350 will yield in 2014.
£75.1 billion payout
Ahead of earnings season, which unofficially gets underway next week, Markit outlines its expectations for payouts by large and midcap UK companies. The financial information firm expects FTSE 350 firms to pay £75.1 billion in ordinary dividends in 2014, an increase of 4.4% on the previous year.
The biggest increases are expected from the the oil and gas, banks and the healthcare sectors, while cuts and suspensions are predicted in the telecoms sector.
The top payers are all yielding over 5%, and the gross yield on the index for the next 12 months is 4.16%.
Biggest expected payments
The five companies account for 29% of ordinary dividend pay outs in the FTSE 350. Interestingly all offer yields in excess of 5% and oil majors BP and Royal Dutch Shell have made commitments to increase pay outs this year.
HSBC Holdings is expected to increase its pay-out by 8%. It is believed the bank is likely to maintain a pay out ratio towards the top of its 40-60% range due to increased earnings and its strong balance sheet, Markit said.
Vodafone still makes the list despite the reduction in its per-share pay-out which will take effect at the time of the final results in May, and will represent a 25.4% decrease year-on-year.
Markit also predicts a 'modest' 5% increase in GlaxoSmithKline’s full-year dividend as earnings growth continues to slow as a result of the patent cliff.
Biggest expected changes
A return to the dividend list is expected when Lloyds Banking announces its interim results, reflecting the guidance provided by the bank in February.
Royal Mail is expected to pay a maiden dividend of £133 million in July.
Among the home builders, Redrow is likely to deliver impressive increases on strong trading. Redrow resumed dividend payments last September and Markit expects the company to pay a FY14 dividend of 4.4p (gross), reflecting positive momentum in earnings.
Linked to the housing boom Foxtons is likely to ramp up its distributions on the back of strong cash flows.
Better outlook drives higher distributions but some challenges remain
The banks are benefiting from improvements in asset quality, reporting better ratios on higher capital requirements and seeing improving profitability as a result of lower impairments.
In line with the guidance provided in February, Markit expects Lloyds Banking to restart dividends in the second half of 2014 at a modest level, with an interim dividend of 56p (gross). On a full year basis, the firm also anticipates a 27% pay-out ratio, estimating a strong increase from the 2014 final dividend.
Barclays said it plans to adopt a pay-out ratio of 40% from 2014 leading Markit to forecast a strong increase in its distribution.
On average growth expectations are 8% in declared pay outs from UK Banks. HSBC Holdings disappointed market participants by announcing maintained Q1-Q3 payments in 2014, however Markit anticipates a 21% rise in the final dividend.
Markit also sees Standard Chartered announcing a modest 4% rise as a slowdown in emerging markets has squeezed margins. The strong balance sheet combined with exposure to emerging markets support shareholder returns for both banks in the longer term.
Growing emphasis on capital discipline
Both Rio Tinto and BHP Billiton have indicated that significant shareholder returns are likely in the next 12 months but neither has confirmed whether this will be through special dividends or share buy-backs.
The majority of the slides in BHP Billiton ’s half-year results were dedicated to the topics of internal competition for capital, capital allocation and shareholder returns.
Markit expects a modest increase in the final dividend when full-year results. Half-year earnings presentation the company repeatedly referred to the ‘base dividend’ and said that this base payment is ‘the minimum annual distribution that a shareholder should expect’.
One of the biggest surprises from this sector was the much bigger than expected final dividend from Chilean miner Antofagasta which represented 142% of earnings.
In future the company will only pay ordinary dividends of around 35% of earnings rather than a combination of regular and special distributions. This should provide greater clarity but lower payments in the coming years, Markit said.
There is also a possibility that a special dividend will be paid by Swiss domiciled Glencore Xstrata from the proceeds of the sale of its Las Bambas mine for around $5 billion.
Meanwhile, Markit is also projecting a flat dividend from Anglo American based on the managements emphasis on sustaining the pay-out at the present level and comments about the ‘headwinds’ facing the company in 2014.
The Financial Services sector offers an average yield of 3.5% and has faced volatile markets and risks related to uncertain regulatory reforms. After a significant cut last year, Markit expects the hedge fund Man Group to resume progressive growth from the new base with an increase of 10%. Last year the hedge fund implemented a new policy of passing on the company’s management fees to investors.
Healthy increases of around 15% are also anticipated in the pay-out of Hargreaves Lansdown and International Personal Finance. Both companies reported increased earnings and assets under management in their last trading updates.
On the other hand, Jupiter Fund Management and Schroders are expected to raise pay outs by 31% and 23% respectively. At the half-year stage, Jupiter reported an 89% increase in profit before tax and assets under management grew by 11%. Conversely,London Stock Exchange and ICAP are likely to lag the sector average with modest rises of around 3%.
Food & Beverage
This year’s Budget will have been welcomed by the drinks industry as the chancellor froze duty on Scotch and other spirits.
Diageo’s current fiscal year ends in June 2014 and Markit's estimate is for a total pay out up to 10%. The company increased its interim dividend by 9% and has a strong track record of steady increases. An upside surprise seems unlikely in view of less buoyant trading in some emerging markets and negative currency impacts, Markit highlighted.
Fellow beverage company SAB Miller will report results for the year ending March 2014 in May and Markit expects a low single digit rise in the dividend, following a similar move at the half-year stage.
Looking at food producer’s dividend growth, Unilever is forecast to be in the low single digits as the level of cover is low and while it reported an upswing in emerging market sales this is dampened by weaker currencies.
The majority of the UK food producers have a fiscal year end in September. All have been reporting improved trading in recent months. Associated British Foods should be well placed to deliver an increase in excess of 10% as its Primark division continues to grow strongly. ABF has faced lower sugar prices and Tate & Lyle has also been struggling with lower prices for its sweeteners so is reshaping its business. Based on this a conservative approach to dividend growth is expected.
Meanwhile, low single digit increases are forecast from Cranswick, Dairy Crest, Devro and Greencore. There is increasing global demand for a meat and dairy products which is driving sales but this is tempered by higher costs.
Big Pharma offering attractive yields in the near term but risks later
Companies in this sector have a good record of progressive increases based on strong cash flow generation. Although they face lower revenues, large pharmaceutical companies still have big cash balances and management teams which are committed to shareholder returns.
In that light, Markit's forecast is for average growth of 9% across the sector, though there are significant disparities.
Al Noor Hospitals and Hikma are expected to increase dividends by 27% and 20% respectively. Al Noor Hospitals just started to pay dividends and the current earnings projections show a significant profits rise in the medium-term. Growth of around 9% is forecasted from Dechra, and Smith & Nephew, while GlaxoSmithKline is likely to continue its trend of 5% rises.
Based on projected revenues and earnings, Markit is forecasting a maintained dividend from AstraZeneca, which equates to a yield of 4.3%. The company faces lower earnings due to the patent cliff and needs to strengthen its pipeline.
Attractive yields and solid increases
As a broad sector, the dividend outlook for industrial goods is mixed. Though some stocks have low yields, most are forecast to post significant increases.
Markit's estimate for Ashtead was revised upward to show a 50% hike. At the half-year stage, the company reported a 49% rise in pre-tax profits, driven by growth in its Sunbelt division in the US.
What's more, dividend growth of around 30% is anticipated from Northgate, Hellermann Tyton, Grafton, Travis Perkins and SIG. Northgate rebased its interim to one third of the annual distribution, and Travis Perkins aims to decrease the dividend cover for 2014 onwards.
Finally, Royal Mail intends to propose a final dividend, to be paid in July 2014, of £133 million. This amount is approximately two-thirds of the full-year distribution of £200 million that would have been proposed if the company had been listed throughout 2014.
Higher pay-out ratios to drive dividend growth
The past 12 months have been very difficult for RSA and Markit expects the company not to pay a 2014 interim dividend as the insurer needs to strengthen its balance sheet. Last year it was downgraded by S&P after issuing three profit warnings within six weeks, linked to capital injections in its Irish business and adverse weather conditions.
In contrast, Markit is projecting growth of around 30% in the pay outs of St James’s Place and Esure. In 2013, St James’s Place reported a 42% jump in IFRS pre-tax profit and a 67% increase in underlying cash. Funds under management increased by 27% thanks to a 28% rise in net inflows. The management is confident that they can deliver an increase in the range of 30 to 40% in 2014.
Markit forecasts maintained pay outs from Admiral and Resolution. Admiral is facing tough competition in its UK Car business, while Resolution aims to improve its dividend cover before moving to a progressive dividend policy.
New listings Just Retirement and Partnership will be impacted by the announcement from the UK Government for major changes to UK annuity rules, which will give retirees complete flexibility over their defined contribution pension plan from April 2015. According to equity analysts, this is likely to result in lower sales of new individual annuities - which represents the majority of the operating profit for both companies.
The media industry is undergoing radical change as new disruptive technologies alter the landscape for established players. For example, last month saw the rollout of Google chromecast in the UK. This presents new opportunities for advertisers who will be able to gather better data on viewing habits, Markit said.
However, the uncertainties mean some established players are likely to take a less bullish approach towards dividend distributions this year. BskyB is committed to progressive growth and we expect moderate steady increases in the near term.
ITV increased its 2013 dividend by 35% but this was coming off a low base and Markit does not expect a repeat this year. The management have also emphasised their desire to retain cash to grow the business while still paying a progressive dividend; we see an increase in the region of 15% for the current fiscal year.
The level of cover has dropped below the target range for Pearson however, they still increased the final payment for 2013 by 7% as a signal of confidence in the outlook for the business.One company that should be in a strong position to reward shareholders is Rightmove, Markit believes. The dividend outlook currently forecasts a 20% increase and this could be revised upwards in light of the strong recovery in demand for housing.
Dividend growth in the mid-teens is predicted from WPP based on the policy of moving towards a pay-out of 45%. The company has hinted that the target may move up to 50% once the existing goal has been reached.
Oil and Gas
Steady flow of cash from the majors
As expected BP’s Q4 dividend announced in February was maintained at the same level as Q3. Last October the company said that the board will review the dividend with the Q1 and Q3 results. Based on the progressive policy Markit is forecasting a $5 increase in the dividend when the Q1 results are published at the end of April and a similar rise at the Q3, resulting in a payout up 11% for the year ending December 2014. </p>
A modest increase of 4% in the 2014 payout is expected from Royal Dutch Shell. This is based on guidance issued at the time of the 2013 final results that it will pay a 2014 Q1 dividend of $47. In keeping with the historical pattern, Markit expects equal payments for the remaining quarters of 2014.
Despite the recent profit warnings linked to events in Egypt we see BG Group continuing its track record of 10% increases as the payout is well covered. Recent updates from analysts indicate that the peak capital expenditure period is coming to an end.
A similar full-year increase is expected from Petrofac, split in proportions of one-third and two-thirds. The forecast is based on the company’s’ target payout ratio of 35% and the latest broker projections for earnings. 2013 profits came in ahead of expectations but the management repeated a cautious outlook for 2014 saying they expect little or no growth as oil companies cut investment
Meanwhile, Markit does not see much likelihood of a higher payout from Tullow Oil this year as the company reported lower profits for 2013 and management continues to target exploration as means of driving shareholder returns.
A flat payout seems likely from Premier Oil, due to stated preferences for share buy-backs, Markit added.
Personal and Household Goods
Buoyant housing market drives Homebuilders, while Tobacco is underperforming
Markit is predicting a 12% increase across the sector, but component sub sectors have very different characteristics.
The main driver is the homebuilding industry where trading conditions have dramatically improved over the last 12 months thanks to the governments 'Help to Buy' incentive. Improved profitability and higher margins are driving positive cash flows and bigger returns to shareholders. Several companies in the sector have recently outlined plans to resume or aggressively increase pay outs. Overall Markit expects this subsector to double its pay out for this fiscal year.
Markit expects Redrow and Barratt Developments to quadruple their distribution, and predicts hikes of between 55% and 75% for Bellway, Bovis and Crest Nicholson. Taylor Wimpey and PZ Cussons are likely to post healthy growth of around 10%.
Traditionally a defensive sector, Tobacco companies currently yield around 4.9% on average. Since 2008, British American Tobacco (BAT) and Imperial Tobacco (IMT) have delivered steady growth of around 11% per annum in their pay outs.
However, this year BAT looks set to slightly underperform its competitor with an expected increase of 3% as the company has less headroom, the report read.
High rising mid-caps
Offering one way to cash in on the housing boom, Markit anticipates Foxtons will more than triple its dividend after initiating payments last year.
Overall the real estate sector is likely to provide a yield in line with index average and dividends are expected to increase by 7% due to increased earnings and improved free cash flow cover. Markit expects little in the way of increases from big players such as British Land, Hammerson and Land Securities. British Land aims to rebuild cover before returning to dividend growth and has an eye on the gearing ratio.
Big Yellow, John Wood Group is expected to provide a boost with a 50% jump as the company aims to increase its pay-out ratio from 60% to 80%. Countrywide is also likely to post a similar rise as the momentum is well oriented. In 2013, adjusted Ebitda rose by 37% on higher margins helped by the improving levels of UK residential property transactions.
Finally, Markit anticipates growth of around 10% in the pay outs of Derwent, Workspace and St. Modwen Properties, alongside a 30% decline from UK Commercial Property Trust, following the decision of paying a more sustainable dividend with a quarterly payment of 92p.
Official data from the Office of National Statistics showed that British retail sales rose faster than expected in February. A stronger housing market and gradual wage growth have increased consumer confidence in recent months. </p>
The outlook for shareholder returns is poor from the supermarkets which are struggling against a tide of discounters and new shopping patterns. Companies which are linked to housing are best placed to deliver cash in the coming months.
Markit said it would be surprised to see any increase in the distributions of Tesco, Sainsbury and Marks & Spencer. That’s not to say that anyone seeking dividends should avoid this sector completely.
Next declared two separate special dividends of 50p each in the first month of the year and management expectation is that the company should generate around £ 300 million of surplus cash in 2015, which will be returned this to shareholders either via quarterly specials or buybacks depending on the share price. They will give 3 months’ notice of any specials.
Scaling up pay outs
Markit expects an increase of around 25% from Arm Holdings which has a stated intention to grow the dividend by more than earnings and the biggest hike is forecast to come from Telecity (29%), which began paying dividends from a low base and raised its last full-year pay-out by 40%.
Pace's management have said that they're confident in making progress during 2014 and Markit predicts the dividend will rise by around 18%.</p>
Slower growth is likely from Sage Group which reported pre-tax profits down sharply for 2013, but raised the dividend and said it is on target to achieve its organic revenue growth target in 2015.
Likewise a modest increase is on the cards from Aveva Group as management indicated it would rather use cash for acquisitions. Markit forecasts a 14% boost to the pay-out of CSR, which would still be covered over three times taking the current consensus earnings estimates.
Continued steady progressive increases are predicted for Laird, Micro Focus, and Spirent. Fidessa should maintain the pattern of special pay outs as it reported improving conditions in all customer markets and a £73 million cash balance at the year end.
Vodafone cut blocks growth signals
The rebasing lower of Vodafone’s dividend is responsible for telecoms pay outs dropping down the ranks of the sector table compared to the previous quarter. Despite the confirmed reduction, Vodafone remains one of the biggest dividend payers in the UK, and Markit said it expects the company to provide an update on the policy along with a strategy update in May, but it should be well placed to grow the dividend progressively from the new level.
The prospects are good for BT which has committed to an increase of at least 15 %. The company has guided to normalised free cash flow in 2014-2015 of around £2.6billion, with payments of £0.3 billion needed for the pension this leaves the dividend well covered.
Among the mid-cap names in the sector TalkTalk, Telecom Plus and KCom will all report results for their trading years ended March 2014 in the second quarter. Each is expected to increase its pay-out by 10 to 15 % based on committed targets or ratios.
Travel and Leisure
Positive outlook for hospitality, travel and gaming while transports companies will lag
The sector is currently yielding 2.5% based on Markit's estimates and the outlook has been steadily improving. Domino’s Pizza, Rank Group and Restaurant Group are expected to deliver dividend growth of around 10%, in line with projected earnings increases from analysts.
Markit is optimistic about the prospects for Intercontinental Hotels’s pay-out thanks to solid cash flow management.
In the travel industry, Tui Travel and Easyjet are expected to keep raising their pay-outs by around 10%. After two years of significant hikes, Easyjet is likely to post normal dividend increases of around 12% in the next three year’ reflecting the earnings projections.
The growth of online gaming means the sector has good metrics with increasing revenue feeding into strong balance sheets and healthy cash positions. Cash generation is strong with dividends well covered by free cash flow -around 2 to 2.5 times.
Ladbrokes, Playtech and Bwin.Party are likely to disappoint with no increase to their pay outs. The same is expected from the transport company Go Ahead. In the meantime, Markit also expects a modest 3.5% rise from National Express but forecasts a 33% decrease from FirstGroup following its restructuring.
Energy companies under the scrutiny of the Ofgem regulator on excess profits
Last month, the UK's electricity and gas markets regulator (Ofgem) proposed an investigation into whether effective competition in the energy market is being stifled. Ofgem said that energy retail profits of Britain’s six largest energy suppliers had soared from £233 million in 2009 to £1.1 billion in 2012 'with no clear evidence of suppliers becoming more efficient in reducing their own costs'.
This adds to the debate on the energy prices since last autumn, with increasing political pressure to reduce the increasing bills while Labour leader, Ed Miliband, announced a plan to freeze power and gas prices until 2017 if elected in 2015.
Lots of uncertainties remain and the recent announcement from SSE to freeze domestic gas and electricity prices until 2016 will not help to drive the profits upward.
While yields may be attractive - averaging 4.5%-, the companies are facing three significant challenges: uncertainty surrounding regulatory changes (water companies), high capital investment requirements and, low levels of dividend cover - negative in some instances.
Excluding Drax, average growth will reach 4% for the main players in the industry. Despite strong balance sheets and high free cash flow cover, energy suppliers will lag the sector with a modest 3% rise this year.
In 2013, Centrica’s adjusted operating profit decreased by 2%, reflecting the lower profitability of British gas. The group expects adjusted earnings per share in 2014 to be lower than in 2013, due to margin pressures in its energy supply businesses on both sides of the Atlantic, rising North Sea unit costs, and weak economics for both gas storage and gas-fired power generation.
On the back of its new dividend policy and OFGEM’s agreement, Markit thinks National Grid is likely to deliver a 3% increase, though leverage remains a concern in the medium term.
On the other hand, water companies aim to increase dividends by more than inflation. By raising its pay-out by 4% above the RPI rate of inflation, Pennon should lead the sector with a 7% rise this year, followed by Severn Trent (6%) and United Utilities (5%).
However, Markit added these pay-outs are at risk from 2016 when the Ofwat will unveil the regulation for the 2015-2020 period.