Strong growth in dividends from the mining and banking sectors enabled another year of significant real dividend growth for the U.K. stock market, according to new research.
Recently published data analysis by OLIM Investment Managers indicates that total UK dividends grew by 7.9% in 2018 and topped £100 billion ($130 billion) for the first time.
OLIM said dollar weakness in first half of 2018 was a significant headwind, as the first six months of 2018 saw a period of sustained gains by the pound, particularly against the U.S. dollar.
UK dividends grew 7.9% in 2018 led by London Stock Exchange listing mining and banking stocks. (Photo: Chris Ratcliffe/Bloomberg)© 2016 Bloomberg Finance LP
This saw the average pound/dollar currency rate weaken by over 4% versus the equivalent rate in 2017, presenting a sizable headwind for sterling dividend receipts given the large proportion of U.K. dividends declared in dollars, it added.
While 2018 was not as strong a year for special payments as the year before, OLIM said FTSE All Share Index constituents still made well over £6 billion of special payments in 2018. Notable payments came from Standard Life Aberdeen, Ferguson and AVEVA.
That said the UK stock market still derives half of its income from just ten companies and over a third from just five. “Worryingly, over a quarter of U.K. market income comes from the highly cyclical mining and oil sectors. Sustained commodity price weakness would put a large part of the U.K. market’s dividend base under threat.”
While 2018 is being construed as reasonably good year, the outlook for 2019 appears clouded by slowing economic growth and Brexit, although currency fluctuations should be helpful. The pound weakened steadily in the second half of 2018 against both the dollar and the euro and this should provide a helpful benefit to sterling dividend receipts in 2019, although at current exchange rates this benefit will be felt mainly on U.S. dollar payments, OLIM said.
Underlying dividend growth is unlikely to match that recorded in 2018 given the effect that weaker oil and commodity prices are likely to have on dividend declarations in these sectors, said Patrick Harrington, Director, OLIM Investment Managers.
“In 2018 the market benefited from strong growth in mining sector dividends; 2019 is unlikely to see the same helpful boost to payments from this area given more recent commodity price movements. Weaker oil prices will affect BP and Royal Dutch Shell’s dividend paying capacity and it is unlikely either will show much, if any, in the way of dividend growth when measured in U.S. dollars.”
Slowing global economic growth and continuing Brexit uncertainty is likely to put a significant brake on dividend growth, although any further Brexit inspired weakness in the pound would clearly be good news for the sterling value of dividends.
Doubts still hang over dividends at GlaxoSmithKline, AstraZeneca and SSE where weakening balance sheets and a lack of either conventional or cash flow dividend cover are putting shareholder payments under pressure, Harrington added.
“These factors should be offset, at least to some extent by a currency tailwind if current exchange rates prevail throughout the year. Low single digit growth in dividends looks the most likely outcome at present,” he concluded.