Brexit boost for dividends
Exchange rate conversions can deliver a huge short-term boost in payments
THE WEAKNESS in sterling following the Brexit vote will boost dividends paid by UK-based firms by £4.3 billion, because of the number of companies that declare income in euros or dollars.
As payments are converted at a much weaker exchange rate, investors are set to receive a huge short-term boost as a result of the decision to leave the European Union, according to the latest dividend monitor from Capita Asset.
Capita based its estimate on sterling maintaining an average $1.33 exchange rate in the second half of this year, an optimistic target. This would boost the translated value of all dividends declared in dollars by £2.7bn over the next six months, with another £120m from those declared in euros.
This would be added to the £1.4bn already booked in the first half of the year as the pound gradually sank ahead of the historic plebiscite.
Capita said the decision to leave the EU had “immediately and materially changed” the dividends picture in both the long and short term.
In the short term, Capita said the pound’s fall to a three-decade low against the dollar will lead to a windfall for a number of FTSE 100 companies, which has been reflected in the list’s resilience, following a sharp drop in the immediate aftermath of the vote. In its report Capita said the lack of a formal plan and timeframe for exit negotiations had created uncertainty, contributing significantly to market instability.
Justin Cooper, chief executive of shareholder solutions, part of Capita Asset Services, said: “The timetable for the UK’s departure from the EU, and the manner of its subsequent relationship with it, are crucial to understanding the future for income investors.
“In the short term, investment and consumption will be depressed while the country waits for a response from the new government, and for a Brexit timetable to emerge.
“Dividends will suffer from any slowdown in economic growth, particularly among the UK’s mid-cap companies, though a persistently weak exchange rate will cushion sterling investors in the UK’s large multinationals.”
He said the longer term was more difficult to predict: “It depends on negotiations and implications regarding access to the single market and external trade negotiations with non-EU countries.”
The latest monitor covers the second quarter of this year, and most dividends had been paid before the referendum. In Q2, a flurry of special dividends took the payout to £28.8bn, up 7.6 per cent on the same quarter last year.
In total, a record 22 companies paid out special dividends in the quarter, including Intercontinental Hotels, which pushed £1bn back to shareholders after selling hotels, while GlaxoSmithKline returned £970m after an asset swap with Novartis.
The specials masked an unremarkable return however with standard dividends down 2.7 per cent to £25.2bn, which at least was in line with pre-Brexit forecasts.
Financials was the best-returning industry, helping the FTSE 100 outperform the 250. This was ahead of consumer goods and oil and gas, though the 73 per cent increase in healthcare dividends stands out. At the opposite end, dividends paid by the basic materials industry, which includes mining, chemicals and forestry, dropped 51 per cent.
HSBC was the top second-quarter company for the fourth year in a row as banks remained the bestperforming sub sector. The industry paid out £4.9bn, ahead of oil and gas, which paid out £3.7bn in spite of the downturn. Travel and leisure leapt 269 per cent to £1.4bn, the biggest year-on-year increase.
Looking ahead to the next 12 months and equity looks set to outperform other asset classes such as government bonds – which have collapsed after the EU vote – and cash savings accounts, which languish at 1.4 per cent. Against this, Capita expects UK equity to yield 3.7 per cent over the next year.
For the full year 2016, Capita has upgraded its forecast for UK dividends by £4.5bn to £82.5bn, an increase of 3.8 per cent compared to 2015.
It has upgraded underlying dividends, which exclude specials, by £1.9bn to £76.9bn, an increase of 0.5 per cent compared to last year.