Sterling appreciation could stall UK dividend growth

A stronger pound could “put a handbrake” on future UK dividend growth, but sectors such as banking may offer decent returns, said Stephen Message, who manages the Legal & General Equity Income Trust.

Message was speaking in response to Link Asset Services’ ‘UK Dividend Monitor’, which yesterday signalled a slowdown for UK company dividend growth this year.

“Given the bulk of dividends in the UK equity market are derived from a handful of companies with the majority of their operations overseas, the relative strength of sterling will be a key driver in the reported rate of dividend growth,” he said.

The pound had risen “meaningfully” over the past year relative to the US dollar, said the fund manager.

But Message also said the banking and food retail sectors offered good potential for dividend growth.

Banks have rebuilt their capital bases since the financial crisis and the risk of fines for misconduct have receded. Also, the rising interest rate environment should be good for them. Message said he held Lloyds Banking Group and Barclays.

He holds Tesco and Morrison’s among other food retailers and said the sector had seen larger brands merge to fight competition from discount retailers, or diversify their revenues. Additionally, consumer incomes were under less pressure, 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,” Message said.

Yesterday, Link Asset Services said it had increased its headline forecast for dividend growth to 1.8% (from a January forecast of 1.6%). This would represent £96.3 billion and compares to an actual £94.4 billion paid last year.

However, the firm had previously warned of a dividend hangover this year, following a record level of pay-outs in 2017.

©2018 funds europe

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