Nobody expected Brexit to trigger a surge in the value of the FTSE 100, and nobody expected it to herald a dividend bonanza, but that’s what has happened. Brexit has cast a shadow over bonds, cash and property, but stocks and shares continue to shine.
Pound down, dividends up
The sharp devaluation of sterling since the shock EU referendum result may be causing massive uncertainty for the UK economy but it’s proving a boon for investors. The plunging pound either side of the vote will generate a £4.3bn dividend bonanza across 2016, according to a new report from Capita Asset Services.
Its latest Dividend Monitor notes that two-fifths of the dividends paid by UK-listed companies are declared in either dollars or euros, reflecting the international nature of the UK stock market. As the pound tumbles, these payments will be converted at a much weaker exchange rate, a huge boost to income investors based in the UK. This will more than offset the dividend cuts from banks, mining companies and others.
More fun to come
While the FTSE 100 has soared on the pound’s collapse, mid-cap share prices have slumped on fears that a slow domestic economy could hit company profitability. The result is yields have actually held steady overall at 3.7%, Capita says. This makes stocks and shares even more attractive in relative terms, given that bond yields plunged to a new low of 0.8% in the aftermath of the vote, while banks and building societies continue to cut savings rates (and will slash them to the bone if the Bank of England cuts the base rate next month).
Brexit isn’t the only trigger for the dividend bonanza: investors also banked a flurry of large special dividends in Q2, which more than quadrupled to £3.5bn year-on-year. Intercontinental Hotels was the star, distributing £1bn after selling hotels in Paris and Hong Kong, while GlaxoSmithKline paid out £970m following an asset swap with Novartis.
Windfall payouts
Bumper earnings at ITV brought a £400m windfall for its shareholders, and Lloyds Banking Group paid out an extra £360m as its capital position strengthened. In total, 22 companies paid a special dividend in Q2, easily the largest number on record for any quarter, propelling quarterly dividends to a record £28.8bn.
It isn’t all good news with dividends falling 2.7% year on year to £25.2bn as cuts from Standard Chartered, Anglo American, Barclays and MW Morrison took their toll. Company profitability has been poor in recent years but the good news for investors is dividends have held up better than profits, although dividend cover is thinning.
Despite the danger, Capita expects total UK dividends to increase by 3.8% this year to a whopping £82.5bn in total. What happens next depends on the Brexit fallout. Dividends will suffer from any slowdown in economic growth, Capita says, particularly among the UK’s mid-cap companies. Although once again, a persistently weak exchange rate will cushion sterling investors in the UK’s large multinationals.
As rival investments fall by the Brexit wayside, company dividends continue to power ahead.