Falling pound “supercharging” UK dividends

The pound’s fall is “supercharging” UK dividends, with investors reaping billions in currency windfalls – although structural issues will lead to significant cuts before the end of the year, it has been forecast.

Sterling has fallen since September, though has enjoyed its best week against the euro since July 2015 after Trump’s surprise victory.

Capita Asset Services indicated in April that UK dividends were in a state of severe year-on-year decline, with little to suggest this trend would reverse.

However, Capita says now that the June 23 Brexit referendum was extremely beneficial for UK dividend investors – in the short-term, at least.

In the third quarter of this year, dividends rose 1.6% to £24.9 billion, although there were cuts of around £2 billion in payouts, largely restricted to the mining sector. The uncertain timeframe around the UK’s exit from the EU meant little had changed for investors in the short term.

“The most significant immediate effect was the devaluation of the pound, which continues to trade at multi-year lows against the dollar and the euro – as roughly two fifths of UK dividends are declared in those currencies, their translated value is higher in sterling terms,” Justin Cooper, chief executive of shareholder solutions at Capita AS, told Funds Europe.

The inflationary effect on dividends will, Capita forecasts, produce a currency windfall of £1.7 billion in the fourth quarter of this year. This dividend bonanza may moreover help explain why FTSE 100 share prices have been high and rising all year – as the sterling value of cash flows earned in foreign currencies rises, the sterling value of share prices moves upwards to reflect the devaluation of the pound.

However, this currency distortion masks an underlying year-on-year fall in dividends in 2016. Moreover, Cooper predicts there will be further cuts on an individual sector and company basis in the final quarter, due to “weak operating performance and rising pension deficits among the UK’s largest companies”.

“While exchange rate gains look set to support UK dividends well into 2017, investors will need a sustained improvement in company profitability in order for the true value of payouts to regain solid upward momentum.  That being said, equities remain in the unusual position they have occupied in recent years, with yields far in excess of government bonds.”

©2016 funds europe

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