UK Dividend Monitor
Introduction Downbeat economic news failed to dent UK share prices in the third quarter, mainly because investors have already priced in the lacklustre performance of the UK economy, and because the global picture remains encouraging. Top 100 share prices were more or less unchanged, held back by a slightly stronger pound against the US dollar, while mid-cap share prices rose a little. Investors showed little concern at the prospect of interest rate increases looming closer. Companies are very cash-generative, which is strongly supporting dividend payments. This meant the third quarter built further on the excellent performance of the first half of the year. The easy gains from the pound s devaluation, where dividends declared in dollars or euros were translated at much more favourable exchange rates, are now behind us, but the profits of those companies with a UK cost-base and overseas markets for their goods and services can continue to benefit. In the latest quarterly Capita Asset Services UK Dividend Monitor, we consider the most recent trends in UK dividend payments, and update our forecast for the full year. Media enquiries: Simon Coughlin Capita press office t: 0207 654 2192 or 0207 654 2399 (out of hours) e: simon.coughlin@capita.co.uk Kirsty Sewter Capita press office t: 0207 654 2386 or 0207 654 2399 (out of hours) e: kirsty.sewter@capita.co.uk For all other enquiries please contact: e: casmarketing@capita.co.uk Capita Asset Services is a trading name of Capita Registrars Limited. Registered office: The Registry, 34 Beckenham Road, Beckenham, Kent BR3 4TU. Registered in England and Wales No. 2605568. Produced in association with Teamspirit. The content of this article does not constitute advice and should not be relied on as such. Specific advice should be sought about your individual circumstances before any action is taken. 2 3
Executive summary Outlook Yield Overview Sectors & Companies Top 100 v Mid 250 The prospective yield on equities was unchanged at 3.7% 2017 is an exciting year for dividends Q3 growth confounded our expectations of a slowdown from the rapid H1 levels Equities remained the most attractive asset class for income This was mainly thanks to the mining sector, and higher specials Q3 dividends reach 28.5bn, up 14.3% year-on-year in headline terms This is the third largest quarter on record, and the largest Q3 on record Mining companies accounted for two-thirds of the total increase, as cash flow in the sector surged higher Rolls Royce restored its payout, joining BT and Lloyds among the better performers Mid-cap and top 100 growth was similar in headline terms, at 14.5% and 12.2% respectively Mid-cap growth exceeded the top 100 on an underlying basis, and three quarters of mid-caps raised their payouts Q4 will see growth largely cancelled out by an exchange rate loss if sterling maintains its current level against the US dollar We upgrade our headline forecast by over 3bn to 94.0bn, a 11.1% increase year-on-year Special dividends rose two-fifths to 1.5bn Underlying dividends (excluding specials) reached 27.0bn, up 13.2% year-on-year Retail was mixed bag, while oil, pharma, and utilities were broadly flat year-on-year 12 sectors raised payouts against 7 that saw them fall Underlying dividends (excluding specials) will reach 87.3bn, also up 11.1% On a constant-currency basis, that means underlying growth will be 8.5% With the anniversary of the sterling devaluation behind us, exchange rate effects were negligible 2018 likely to see slower growth than 2017, and without the added excitement of big fx gains 4 5
Overview UK Dividends Billions 100 90 Q3 dividends reach 28.5bn, up 14.3% year-on-year in headline terms Special dividends rose two-fifths to 1.5bn 80 70 60 This is the third largest quarter on record, and the largest Q3 on record UK companies paid their shareholders 28.5bn in dividends between June and September, a record for the third quarter, and the third-largest quarterly total ever paid. The 14.3% increase was in line with the dramatic growth in the first half of the year, though it was much less dependent on one-off exchange-rate effects. The anniversary of the pound s devaluation following the Brexit vote passed in June, and although sterling was even lower against the euro this summer compared to summer 2016, it had recovered some lost ground since its low point against the dollar, restoring it to almost same level as Q3 last year, meaning payments were translated at similar exchange rates. Since just over 1 in every 3 of UK dividends in the period was declared in dollars, compared to a mere 1 in every 50 declared in euros, the total exchange-rate gain was negligible. At 58m, it added just 0.2% to the Q3 sterling pot. By contrast, between January and June, the sterling value of UK dividends was boosted by 5.1% or 2.5bn. Underlying dividends (excluding specials) reached 27.0bn, up 13.2% year-on-year With the anniversary of the sterling devaluation behind us, exchange rate effects were negligible Special dividends made a bigger contribution, rising by two-fifths to 1.5bn, with a particularly large 960m payout coming on top of its regular dividend from contract caterer Compass. The company highlighted its strong cash generation as the reason for its generosity to shareholders. Housebuilder Taylor Wimpey paid a special for the third year running, as it continued to capitalise on what has been a robust housing market. Underlying dividends, which exclude specials, reached 27.0bn, a Q3 record, and the second largest underlying payout for any quarter ever. The total was 13.2% higher year-on-year, slightly slower than the growth rate reached in the first half, but crucially dispensing with the supercharge of a weakening pound. In fact, on a constant-currency basis, growth of 12.9% marked a significant acceleration in Q3 and was faster than in any quarter since 2012. 50 40 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017e Regular Dividends Special Dividends Dividends Paid bn Q1 Q2 Q3 Q4 Full Year 2007 9.6 20.2 15.6 11.8 57.2 yoy 2008 11.4 20.3 17.1 12.7 61.6 yoy 20% 1% 10% 7% 8% 2009 12.7 15.4 15.7 9.9 53.7 yoy 11% -25% -8% -22% -13% 2010 13.7 14.1 16.9 9.3 54.1 yoy 8.4% -8.1% 8.1% -6.4% 0.8% 2011 14.2 16.0 19.5 11.6 61.4 yoy 3.6% 13.6% 15.2% 24.8% 13.5% 2012 17.2 21.3 21.7 12.8 73.0 yoy 20.9% 32.8% 11.1% 10.5% 18.9% 2013 12.8 23.3 22.9 13.8 72.9 yoy -25.4% 9.6% 5.7% 7.3% -0.2% 2014 27.8 23.4 23.2 13.7 88.1 yoy 116.8% 0.3% 1.3% -0.4% 21.0% 2015 13.3 26.7 24.6 14.8 79.4 yoy -52.2% 14.2% 5.8% 8.3% -9.9% 2016 14.1 29.1 24.9 16.6 84.7 yoy 5.8% 8.7% 1.6% 11.7% 6.6% 2017e 15.4 33.4 28.5 16.7 94.0 yoy 9.5% 15.1% 14.3% 0.5% 11.1% 6 7
Special Dividends and Overview, continued Exchange Rate Factors Growth in quarterly dividends, year on year Percentage 40 30 20 10 0 Special Dividends Billions 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 Exchange rate boost / penalty Billions 5.0 4.0 3.0 2.0 1.0 0.0-1.0-2.0-10 0.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017e - 3.0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017e -20-30 08Q1 08Q2 08Q3 08Q4 09Q1 09Q2 09Q3 09Q4 10Q1 10Q2 10Q3 10Q4 11Q1 11Q2 11Q3 11Q4 12Q1 12Q2 12Q3 12Q4 13Q1 13Q2 13Q3 13Q4 14Q1 14Q2 14Q3 14Q4 15Q1 15Q2 15Q3 15Q4 16Q1 16Q2 16Q3 16Q4 17Q1 17Q2 17Q3 Year (Qtr) Rolling twelve month dividends Billions 95.0 Regular Dividends Special Dividends 90.0 85.0 80.0 75.0 70.0 65.0 60.0 55.0 50.0 07Q4 08Q1 08Q2 08Q3 08Q4 09Q1 09Q2 09Q3 09Q4 10Q1 10Q2 10Q3 10Q4 11Q1 11Q2 11Q3 11Q4 12Q1 12Q2 12Q3 12Q4 12Q1 13Q2 13Q3 13Q4 14Q1 14Q2 14Q3 14Q4 15Q1 15Q2 15Q3 15Q4 16Q1 16Q2 16Q3 16Q4 17Q1 17Q2 17Q3 Year (Qtr) 8 9
Sectors & Companies Rolls Royce restored its payout, joining BT and Lloyds among the better performers 12 sectors raised payouts against 7 that saw them fall Mining companies accounted for two-thirds of the total increase, as cash flow in the sector surged higher Retail was mixed bag, while oil, pharma, and utilities were broadly flat year-on-year By far the largest contribution to the 3.6bn year-on-year increase in UK plc dividends came from the mining sector, building on its success in the second quarter. Its payouts rose by 2.4bn. As recently as 2013, with its profits having ballooned after a spell of sky-high commodity prices, this single sector paid almost one tenth of all UK dividends. When prices fell back to earth with a bump, the whole sector embarked on drastic restructuring, and slashed dividends to preserve much-needed cash. By 2016, mining payouts had fallen to less than 4% of the UK total. To prevent a repeat, Rio Tinto and BHP Billiton, among others, changed their dividend policies, abandoning the progressive approach, which sees payouts rise every year, and opting instead to pay out a set ratio of profits, meaning that dividends would be more affordable since they would rise and fall with the fortunes of the industry. A year ago, commodity prices began to rebound, and mining profits have soared, as higher revenues meet stream-lined cost bases. Dividends have now followed suit. Earlier in the year we pencilled in restored payouts from all the major players, but the seam has been richer than investors expected, with the haul almost quadrupling in the third quarter to 3.3bn. The largest payer is Rio Tinto. It distributed 1.1bn as its profits surged, more than doubling its payout from this time last year, and making this its largest ever interim dividend. The company has also announced a huge share buy-back programme to return even more surplus cash to shareholders. Anglo American also surprised the market, restarting its dividend six months earlier than expected, and distributing 518m. Profits from iron ore and coal meant the company was well ahead of its debt targets, leaving spare cash for shareholders. Meanwhile, BHP Billiton tripled its payout, having generated more cash than in some years of the mining boom, Evraz made its first payment in three years, and all other companies in the sector raised payouts year-on-year. The performance of the rest of UK plc seemed to lack some lustre, but the loss of SAB Miller from the index on its takeover by AB-Inbev made a major, artificial, dent, and explains the drop in dividends from the beverage sector. Rolls Royce boosted the industrial goods and support services sector, having cancelled its summer 2016 payment, BT pushed the telco total higher on the back of strong results and Lloyds continued to provide almost all the growth in the banking sector. Retail was a mixed bag: Sainsbury s cut its payout on a poor profit performance, and Marks & Spencer did not repeat its special dividend of last year, while clothing retailer Next paid the second in series of four specials, designed to return surplus cash to shareholders, inspiring confidence in the company s financial position against a more difficult consumer spending backdrop. Food wholesaler Booker, currently the subject of a takeover bid by Tesco, also paid a hefty special. Elsewhere, dividends from the oil, pharma, and utilities sectors were broadly flat year-on-year. 10 11
Sectors & Companies, continued Dividends top companies Rank 07Q3 08Q3 09Q3 10Q3 11Q3 12Q3 1 Vodafone Group plc Vodafone Group plc Vodafone Group plc Vodafone Group plc Vodafone Group plc Vodafone Group plc 2 Royal Dutch Shell Plc BP plc BP plc Royal Dutch Shell Plc Royal Dutch Shell Plc Royal Dutch Shell Plc 3 HSBC Holdings plc Royal Dutch Shell Plc Royal Dutch Shell Plc HSBC Holdings plc HSBC Holdings plc HSBC Holdings plc 4 BP plc HSBC Holdings plc HSBC Holdings plc Glaxosmithkline plc Glaxosmithkline plc BP plc 5 BT Group BT Group Glaxosmithkline plc Tesco plc National Grid Plc National Grid Plc Subtotal bn % of total dividends 6.2 7.1 7.4 7.1 7.4 7.8 40% 42% 42% 42% 38% 36% 6 Glaxosmithkline plc Glaxosmithkline plc Tesco plc BP plc 7 Tesco plc Tesco plc National Grid Plc BHP Billiton plc Tesco plc 8 National Grid Plc National Grid Plc 9 10 Scottish & Southern Energy plc National Grid Plc Glaxosmithkline plc Tesco plc BHP Billiton plc BHP Billiton plc Astrazeneca plc BHP Billiton plc BHP Billiton plc 11 Astrazeneca plc Astrazeneca plc 12 Taylor Wimpey Scottish & Southern Energy plc 13 Segro Plc Sabmiller plc Astrazeneca plc Sabmiller plc Astrazeneca plc Astrazeneca plc Scottish & Southern Energy plc Scottish & Southern Energy plc Sabmiller plc Sabmiller plc Sabmiller plc Rio Tinto plc Rio Tinto plc Rio Tinto plc Reckitt Benckiser Group Plc Reckitt Benckiser Group Plc 14 BHP Billiton plc Taylor Wimpey Man Group plc BT Group 15 Sabmiller plc Anglo American plc Subtotal bn Top 15 Grand Total % of total dividends Imperial Group plc Man Group plc Scottish & Southern Energy plc Reckitt Benckiser Group Plc BT Group SSE Plc. BT Group Reckitt Benckiser Group Plc 3.9 4.5 4.5 5.0 6.2 7.2 10.1 4.5 11.9 12.1 13.7 15.7 65% 68% 76% 73% 70% 68% Dividends top companies Rank 13Q3 14Q3 15Q3 16Q3 17Q3 1 Vodafone Group plc Vodafone Group plc Vodafone Group plc Royal Dutch Shell Plc Royal Dutch Shell Plc 2 Royal Dutch Shell Plc Royal Dutch Shell Plc Royal Dutch Shell Plc Vodafone Group plc Vodafone Group plc 3 HSBC Holdings plc HSBC Holdings plc HSBC Holdings plc HSBC Holdings plc HSBC Holdings plc 4 BP plc BP plc BP plc BP plc BP plc 5 National Grid Plc National Grid Plc National Grid Plc Sabmiller plc Subtotal bn % of total dividends 8.5 7.1 7.5 9.0 9.8 37% 30% 30% 36% 34% 6 Glaxosmithkline plc Glaxosmithkline plc Rio Tinto plc National Grid Plc Rio Tinto plc 7 8 Tesco plc Tesco plc Glaxosmithkline plc BT Group BT Group National Grid Plc 9 Sabmiller plc Rio Tinto plc Sabmiller plc Glaxosmithkline plc Compass Group Plc 10 BHP Billiton plc BHP Billiton plc BHP Billiton plc Astrazeneca plc Glaxosmithkline plc 11 Rio Tinto plc Sabmiller plc Astrazeneca plc SSE Plc. Astrazeneca plc 12 Astrazeneca plc Astrazeneca plc BT Group Lloyds Banking Group plc Lloyds Banking Group plc 13 SSE Plc. BT Group SSE Plc. Rio Tinto plc BHP Billiton plc 14 BT Group SSE Plc. 15 Glencore Xstrata plc Subtotal bn Top 15 Grand Total % of total dividends Intercontinental Hotels Group Lloyds Banking Group plc Reckitt Benckiser Group Plc SSE Plc. Glencore plc WPP Plc. Anglo American plc 7.2 7.3 7.6 7.2 8.5 15.7 14.4 15.1 16.2 18.3 68% 62% 62% 65% 64% 12 13
Sectors & Companies, continued Dividends by industry Dividends by industry Dividends by Industry m 07Q3 08Q3 09Q3 yoy 10Q3 yoy 11Q3 yoy 12Q3 yoy Dividends by Industry m 13Q3 yoy 14Q3 yoy 15Q3 yoy 16Q3 yoy 17Q3 yoy Resources & Commodities 971 1,020 697-32% 1,473 111% 2,021 37% 2,800 39% Resources & Commodities 2,558-9% 2,726 7% 2,960 9% 1,060-64% 3,478 228% Consumer Goods & Housebuilding 1,529 1,940 1,738-10% 2,315 33% 2,614 13% 2,829 8% Consumer Goods & Housebuilding 3,106 10% 3,405 10% 3,339-2% 3,903 17% 3,597-8% Retail & Consumer Services 2,514 2,522 1,906-24% 1,916 1% 2,353 23% 2,441 4% Retail & Consumer Services 2,495 2% 3,148 26% 2,188-31% 2,557 17% 3,042 19% Banks & Financials 2,424 2,390 1,762-26% 2,032 15% 2,142 5% 2,352 10% Banks & Financials 2,703 15% 2,924 8% 4,223 44% 4,592 9% 4,658 1% Healthcare & Pharmaceuticals 995 1,101 1,252 14% 1,421 14% 1,556 10% 1,572 1% Healthcare & Pharmaceuticals 1,643 5% 1,625-1% 1,667 3% 1,906 14% 1,911 0% Industrials 602 639 628-2% 620-1% 655 6% 940 43% Industrials 1,128 20% 1,307 16% 1,551 19% 1,260-19% 1,698 35% Oil, Gas & Energy 2,326 2,769 3,397 23% 2,173-36% 2,741 26% 3,024 10% Oil, Gas & Energy 3,293 9% 3,349 2% 3,614 8% 4,358 21% 4,534 4% Information Technology 36 26 52 103% 71 38% 87 22% 74-15% Information Technology 174 136% 78-55% 89 14% 78-12% 57-27% Telecoms 3,231 3,611 2,973-18% 3,517 18% 3,758 7% 3,801 1% Telecoms 4,013 6% 2,732-32% 2,927 7% 3,158 8% 3,517 11% Domestic Utilities 945 1,064 1,274 20% 1,411 11% 1,594 13% 1,857 17% Total 15,573 17,080 15,678-8% 16,950 8% 19,521 15% 21,689 11% Domestic Utilities 1,802-3% 1,922 7% 1,998 4% 2,078 4% 2,036-2% Total 22,915 6% 23,217 1% 24,557 6% 24,949 2% 28,529 14% Dividends by sector Sector m 16Q3 17Q3 Change Year On Year Concentration of UK Dividends Q3 2017 Mining 921 3,336 262% Industrial Chemicals 139 142 3% Motor Manufacturing & Parts 51 53 5% Beverage & Food Producers 1,410 266-81% Consumer Goods & Housebuilding 2,443 3,278 34% 9.8bn Media 963 779-19% Food & General Retailing 969 951-2% Airlines, Leisure & Travel 625 1,313 110% 15.2bn Top 5 Next 10 The rest Banks 2,308 2,536 10% General Financials 1,024 809-21% General & Life Insurance 860 826-4% Property 400 488 22% Healthcare & Pharmaceuticals 1,906 1,911 0.3% Building Materials & Construction 47 58 21% 8.5bn Industrial Goods & Support 1,213 1,641 35% Oil, Gas & Energy 4,358 4,534 4% Information Technology 78 57-27% Telecoms 3,158 3,517 11% Domestic Utilities 2,078 2,036-2% 14 15
Top 100 v Mid 250 Top 100 v Mid 250 Annual Growth Per Quarter Percentage 70 Top 100 Mid 250 50 30 10-10 -30 Mid-cap growth exceeded the top 100 on an underlying basis, and three quarters of mid-caps raised their payouts Mid-cap and top 100 growth was similar in headline terms, at 14.5% and 12.2% respectively -50 09Q1 09Q3 10Q1 10Q3 11Q1 11Q3 12Q1 12Q3 13Q1 13Q3 Year (Qtr) 14Q1 14Q3 15Q1 15Q3 16Q1 16Q3 17Q1 17Q3 The headline growth rate for the top 100 and mid-caps was similar in the third quarter, at 14.5% and 12.2% respectively. Once a sharp decline in one-off special dividends is taken into account, growth from the mid-caps was significantly faster, up 27.7% year-on-year. Half of this was thanks to Evraz restoring its payout, while the demotion of Royal Mail out of the top 100 also made a significant contribution. Even so, almost three quarters of mid-caps increased their dividends year-on-year. Underlying growth from the top 100 was 11.3%. 17Q3 Share of UK Dividends 0.6bn 3.1bn Top 100 Mid 250 The top 100 made up a little under nine-tenths of the total, the mid-caps just over one tenth. The small caps accounted for only 1 in every 50. The rest 24.8bn 16 17
Yield The prospective yield on equities was unchanged at 3.7% Equities remained the most attractive asset class for income The prospective yield over the next twelve months was unchanged at 3.7% excluding the effect of any special dividends that may get paid in the future. The top 100 will yield a touch over 3.8% (unchanged), while the mid-caps saw their collective yield rise slightly to 2.7%. Equities remained comfortably the most attractive of the main asset classes for income, as they have for several years now. The UK 10 year gilt yield rose a touch over the quarter, reaching 1.4%, while instant access savings and residential property (after running costs) were unchanged at 1.3% and 2.9% respectively. UK Income Q3 2017 Percentage 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Top 100 Mid 250 10 year UK gilts (source FT) Instant access Residential savings (source Property Moneyfacts) (source LSL Property Services plc less costs) 18 19
Outlook 2017 is an exciting year for dividends Q3 growth confounded our expectations of a slowdown from the rapid H1 levels Underlying dividends (excluding specials) will reach 87.3bn, also up 11.1% This was mainly thanks to the mining sector, and higher specials Q4 will see growth largely cancelled out by an exchange rate loss if sterling maintains its current level against the US dollar 2018 likely to see slower growth than 2017, and without the added excitement of big fx gains Dividend growth in the third quarter confounded our expectations of a slowdown on the rapid levels seen in the first half. This was mainly down to the dramatic rebound in mining payouts, which significantly exceeded market expectations. This boost will not be repeated in the fourth quarter. Even so, we are optimistic that growth will continue for both the midcaps and the top 100, though likely at a more modest rate as payouts begin to encounter the higher base set late last year. Special dividends have been stronger than we expected so far this year, and have already topped the total achieved in the whole of 2016. They are now on track to exceed 6.5bn, making 2017 the second largest year for specials on record. We explained in our last issue that the bonus sterling s devaluation was giving investors would disappear by Q3, and this is indeed what has happened. In fact, with the US dollar markedly weaker of late against the pound and other currencies, investors will see an exchange rate loss in the fourth quarter for the first time in three years, as dollar dividends are translated to pounds at less favourable exchange rates than in the same period in 2016. This loss will be larger than we originally expected if current exchange rates persist at roughly their current levels until the end of December, and will largely cancel out growth at the company level in Q4. Q4 is therefore likely to feel disappointing after such a strong first three quarters of the year. 2017 has been an exciting year for dividends. With billions more being paid by the mining sector than we and the market expected, and a surprisingly large haul of special dividends, we are upgrading our forecast again, by over 3bn. We now expect 2017 headline payouts of 94.0bn, an increase of 11.1% year-on-year, and easily a record for UK plc. Underlying dividends (excluding specials) will reach 87.3bn, also up 11.1%, equally breaking a new record. On a constant-currency basis, underlying growth will be 8.5%. We will introduce our 2018 forecast in our next edition. The mining sector is likely to add further to the growth rate in 2018, though its impact will be smaller than this year, since much of the good work has already been done. Tesco s investors can look forward to their dividend being restored too. The froth of exchange rate gains will be gone, however, unless the pound takes another jolt downwards as the Brexit talks unfold. All in all, 2018 is unlikely to be as dramatic in growth terms for income investors, but the overall value distributed by UK plc will remain at or near 2017 s record levels. UK Dividends Billions 100 90 80 70 60 50 40 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017e Regular Dividends Special Dividends We upgrade our headline forecast by over 3bn to 94.0bn, a 11.1% increase year-on-year On a constant-currency basis, that means underlying growth will be 8.5% 20 21
Appendix Statistical Methodology Capita Asset Services analyses all the dividends paid out on the ordinary shares of companies listed on the UK Main Market. The research excludes investment companies such as listed investment trusts whose dividends rely on income from equities and bonds. The Dividend Monitor takes no account of taxation on dividends, which varies according to investor circumstances. The raw dividend data was provided by Exchange Data International, and additional information is sourced directly from companies mentioned in the report. 22 23
Media enquiries: Simon Coughlin Capita press office t: 0207 654 2192 or 0207 654 2399 (out of hours) e: simon.coughlin@capita.co.uk Kirsty Sewter Capita press office t: 0207 654 2386 or 0207 654 2399 (out of hours) e: kirsty.sewter@capita.co.uk For all other enquiries please contact: e: casmarketing@capita.co.uk Capita Asset Services is a trading name of Capita Registrars Limited. Registered office: The Registry, 34 Beckenham Road, Beckenham, Kent BR3 4TU. Registered in England and Wales No. 2605568. Produced in association with Teamspirit. The content of this article does not constitute advice and should not be relied on as such. Specific advice should be sought about your individual circumstances before any action is taken.