FTSE 100 companies are on course to produce strong dividend growth this year, thanks to a recovery in mining stocks and weak sterling.
Just under 60 of the FTSE 100 firms will report first half trading updates over the summer. Of the 53 blue chips which have reported so far, two have cut their interim dividend payouts.
Once special dividends are incorporated, Direct Line's (DLG) total payout was lower year-on-year, even though its ordinary dividend had risen substantially.
In spite of these blips, research by AJ Bell shows FTSE 100 dividends grew by 15% after first-half reporting (excluding special dividends). Results are still to come from Antofagasta (ANTO), Bunzl (BNZL), Persimmon (PSN), and WPP (WPP).
AJ Bell forecasts that dividend payouts will total £84.7 billion in 2017, which would equate to a dividend yield of around 4%. This is far ahead of inflation at 2.6% and the 10-year gilt yield at 1.1%.
The companies below have grown their dividends by at least 10% at the interim stage:
|Company||Interim dividend increase|
|Taylor Wimpey (TW)||334%|
|Rio Tinto (RIO)||158%|
|Anglo American (AAL)||100%|
|Direct Line (DLG)||39%|
|Old Mutual (OML)||32%|
|Coca-Cola Hellenic Bottling (CCH)||29%|
|Rentokil Initial (RTO)||27%|
Source: AJ Bell
AJ Bell investment director Russ Mould noted that sterling's fall against the euro and dollar played a role in boosting dividend payments. This is particularly true for international earners, such as BP (BP), Shell (RDSA), HSBC (HSBA) and Unilever (ULVR), as the non-sterling dividends are worth more when translated into sterling.
However, he warned that as time moves on the currency boost annualises out and the spotlight will fall on underlying dividend growth. In the case of BP, Moore said this will be a challenge because its underlying dividend growth is close to zero.
In the fund manager's opinion, the best income opportunities lie in the areas that were hardest hit during the downturn.
‘The income-paying ability of mining stocks is under-appreciated. These companies all cut their dividends in 2015-2016, so there’s still some scar tissue with investors,' Moore said.
'But this provides opportunity. Even banks should be coming back on the radar of the income investor,' he added.
Moore also likes life insurers. Here, he favours Legal & General (LGEN), which has grown its dividend by more than 15% a year for three years and represents one of the largest positions in the fund.
Miton Income has little exposure to companies that are reliant on the health of the UK consumer. For example, it has no food retailers or property companies and has a small exposure to housebuilders, leisure companies and general retailers.
‘Only around one third of revenues of companies in the fund are earned in the UK,’ he said.
Moore added that the outlook for income remains positive due to the prevalence of overseas earnings on the main index.
‘It is quite easy to find blue chip stocks with attractive yields. Also, the prospects for dividend growth this year are reasonable,’ he noted.
Colin Morton, manager of Franklin UK Equity Income fund, said the earnings season ‘showed no signs of a disaster’. However, companies returning cash to shareholders could mark a more defensive outlook.
‘Special dividends can be a reflection that companies would rather return money to shareholders than invest it elsewhere, signalling a lack of investment opportunities and potential concerns around Brexit and economic growth,’ he said.
‘As such, special dividends can be a double-edged sword.’
Mould also sounded a warning over the earnings coverage of the dividends being paid out.
'Income-seekers need to consider the fact that forecast FTSE 100 aggregate earnings for 2017 only cover forecast dividends by around 1.6 times, when a figure of two or above would give more comfort that the payment estimates are entirely reliable,' Mould said.
An unexpected economic downturn, for example, could lead to dividend cuts, just as it did in 2008 and 2009, rather than the growth that is currently anticipated, the investment director added.