SLUGGISH PERFORMANCE FROM LARGEST FTSE FIRMS WEIGHS HEAVILY ON DIVIDEND GROWTH

• Headline dividends rise just 1.2% year on year in Q2, slowest growth in over three years
• Total payout reaches £25.8bn in Q2
• Top 15 payers, who account for 61% of Q2 dividends, see dividends fall 0.8%
• Slow corporate earnings growth and strength of sterling take toll on dividend growth
• Commodity and financial firms, most exposed to currency effects and global headwinds,         worst performers in quarter
• Real estate, housebuilders, retailers, and industrials benefit from UK economic improvement
• Forecast for 2014 cut by £900m to £98.5bn, but 2015 likely to see pick-up

 UK dividend growth slowed to a crawl in the second quarter, according to the latest UK Dividend Monitor from Capita Asset Services, which provides expert shareholder and corporate administration services. Dividends climbed just 1.2% year on year to £25.8bn, weighed down by falling payouts from the biggest FTSE 100 firms. This was the smallest increase in a quarterly total since 2010 (barring an unusual Q1 2013).

Excluding special dividends, growth was faster, but not by much. The total underlying payout inched forward 3.2% in the second quarter, making it the third weakest rate of growth in three and half years. Special dividends added £705m in the second quarter, less than the £1.2bn total in the same period a year ago.

Sub-inflationary headline level growth has been slowed by falling contributions from the largest constituents of the FTSE 100. Given their size and global operations, these firms are the most exposed to global headwinds and the current strength of the sterling, which have hampered earnings and dividends. This is reflected in a decline in payouts in sterling terms.

Payouts from the top five, who account for 34% of the second quarter’s total, fell 0.3%. Among the top 15, who make up more than three fifths of the UK’s dividends, eight companies saw their payouts decline. Dividends from the top 15 fell 0.8% year on year.

A weak performance from the biggest payers obscured more encouraging growth from those outside the top 15, who have been more heavily impacted by the UK economic recovery. These saw an average increase in dividends of 4.4%, although they only account for two fifths of dividends paid, and this rate of growth is still sluggish by historic standards.

The strength of sterling against the dollar continued to take its toll on the UK’s largest firms, impacting the seven of the top 15 which declare their earnings in dollars. The pound ended the second quarter at US$1.71, having risen 2.6% over the period. By the end of June 2014 it was 12.5% stronger against the dollar compared to a year ago.

Commodity firms and financials felt the brunt of global economic turbulence and currency effects. Mining firms saw their payouts fall 10.1%. Among financials, banks, insurers and financial services firms all paid lower dividends. Companies heavily exposed to the recovering UK economy performed more strongly. Consumer services firms (+18.1%), were buoyed by the travel and leisure sector and general retailers, while housebuilders propelled the household goods and home construction sector up 8.4%. Real estate services firms (which include estate agents) also did well. Riding the wave of the property boom, many were able to raise their dividends, and the sector was boosted by newcomers to the market over the last year.

The ongoing strengthening of the pound and slower earnings momentum has compelled Capita Asset Services to reduce its full year forecast for dividend income. Having cut its forecast by £1.7bn in April, the firm has now reduced it by a further £900m, from £99.4bn to £98.5bn for the year. This implies underlying dividends will climb 3.5% to £80.6bn. Special dividends will leap ahead to £17.9bn (up from £2.4bn last year), as a result of the Vodafone Q1 payout. 2014 will see the slowest growth since 2010, when BP cancelled its payout.

While 12 month yields on equities have dropped to 4.1% following stronger share prices and weakening dividend growth, they remain higher than 10-year gilt yields (2.75%), property rental yields (3.6%) and cash deposits (1.3%).

Justin Cooper, chief executive of Shareholder solutions, part of Capita Asset Services said: “Investors saw dividend payouts begin the year with a bang thanks to Vodafone’s big special, but just one quarter on, headline growth has become a whimper, as the serious headwinds facing investors reasserted themselves. Given their size and contribution to the total amount paid out, income investors are a hostage to the fortunes of the very biggest listed companies. These global companies have felt the impact of a surging sterling and slowing momentum in the global economy, and struggled to maintain – let alone raise – the amount they are returning to investors. This has dragged down the performance of the whole market.

“We should see a pick-up in 2015. It’s hard to imagine the currency continuing to detract from growth, and if the pound maintains its current level it will only have a small impact in the first half of next year. Equally, if as forecast, the global economy picks up speed, it will be felt right at the top of the FTSE 100, and this should filter its way into investors’ pockets.”