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Growth in UK dividends slows

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Dividends from UK companies showed slower growth as sterling strengthened against the dollar, but this is expected to reverse in the next quarter.

UK dividends reached £16.7bn in the first quarter of 2018, 1.2% higher than a year ago, according to the Link Asset Services Dividend Monitor (formerly Capita Asset Services). On the plus side, a switch in the way dividends are paid by British American Tobacco boosted overall payouts, along with a pre-takeover special dividend from Sky. However, this was not enough to compensate for the weaker dollar. Lots of large British companies pay dividends in dollars and therefore payouts are lower when the dollar is weaker.

However, Link said the stronger pound masked a solid performance from UK plc on a constant-currency basis, and it still expects UK dividends to beat their 2017 record this year. The pound was 12% stronger compared to the same period in 2017.

The first quarter is dominated far more than at other times during the year by a handful of large payers, whose dividends are showing little or no growth. Almost a quarter of the total was paid by the oil majors, Shell and BP. Higher oil prices have not yet led to higher payouts from these companies.

Once the stronger pound was factored in, the sterling total from the oil sector was 15.3% lower year-on-year. The pharmaceutical giants Astrazeneca and Glaxosmithkline were also major contributors.

Over the period, mid-cap dividends fell 10.8%, though this was mainly for technical reasons – Aberdeen Asset Management has been taken over by Standard Life, Amec has been taken over by Wood Group, and GVC has delayed its payout until May this year. Without the impact of just these three events, mid-cap dividends would have risen 5.2%, broadly in line with Link’s 6% forecast. Mid cap companies dividends’ have consistently grown faster than their large cap peers.

Lower share prices mean the yield on shares has risen over the quarter. The forward-looking twelve-month yield on UK equities rose to 3.9% (excluding specials), up from 3.5% three months ago. Link expects total headline UK dividends of £96.3bn for 2018, an increase of 1.8%, and a new record high.

Justin Cooper, chief executive of Link Market Services, part of Link Asset Services, said: “The stock market recently reminded investors that volatility is the norm for share prices, not the exception. When markets become this choppy, it’s well worth remembering that profits continue to be made, and dividends continue to be paid, and that, over the long-term, dividends constitute the lion’s share of an investor’s returns.

“Dividend growth in the first quarter was a bit disappointing when excluding one-offs…Investors shouldn’t be worried, however. If you take exchange rates out of the picture, dividend growth will continue in 2018 only a little slower than last year. In sterling terms, of course, it’s going to feel much less exciting. As the dollar has steadily weakened, so all those dividends that will be paid this year will attract a much less favourable exchange rate. This year’s exchange rate roundabouts will be a lot less fun than last year’s swings. Even so, we still expect UK payouts to breach another new record.”

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