Interactive Investor

Dividend growth at its lowest since 2010

26th January 2015 13:09

Faith Glasgow from interactive investor

Underlying UK dividends grew by just 1.4% in 2014, the slowest rate of growth for four years and a decline in real terms, according to the latest Capita UK Dividend Monitor report.

Excluding special dividends, payouts worth £79.1 billion were made to shareholders last year. Only the recessionary years of 2009 and 2010 saw weaker dividend growth.

However, with the addition of special dividends worth £18.3 billion, the headline figure was boosted to £97.4 billion - an all-time dividend record for the UK and 21% ahead of 2013.

Vodafone's huge special payment of £15.9 billion in the first quarter accounted for most of it.

The currency effect

Low underlying dividend growth during 2014 was a reflection of sterling strength in the first part of the year, according to Capita.

"With so many of our big companies reporting in foreign currencies, the strength of sterling knocked £3.5 billion off headline dividends," says the report. The currency effect accounted for almost all the difference between Capita's original forecast of £101.1 billion for 2014, and the final figure.

Sluggish underlying growth was also influenced by various other factors, including the lack of profit growth among UK companies and profit warnings from various parts of the economy, most notably supermarkets.

Tesco slashed dividends and fell from 13th in 2013 to 19th place in the UK dividend rankings. Commodities firms were also hard hit, with mining dividends cut by 8%; again, the strong pound made a big difference.

"Without the drag of the strong pound, underlying dividends would have been about £2.5 billion higher and would therefore have risen 4.6%, a modest but creditable growth rate," adds Capita.

Although the FTSE 100 recorded a headline increase in dividends of almost 23% over 2013, to £87.7 billion, the vast majority of that rise was down to the Vodafone special payment.

Mid-cap firms beat blue chips

Overall, the FTSE 100's underlying dividends were up just 0.7%, reflecting its international bias. More than half of that growth was due to the recovery of the US dollar in the second part of the year.

In contrast, mid-cap payouts grew by 8%, more than 10 times as much as the blue chips. "They are less exposed to the world economy and to the exchange rate,"explains Capita.

Despite the problems faced by supermarkets, strong performances were seen from consumer services, especially general retailers and travel firms, as consumer spending strengthened. Construction, electronics, estate agents and insurance firms were also able to return more cash to shareholders.

Capita expects that 2015 will be a rather different experience. Factors such as rising concerns about the world economy, the strengthening dollar and the low oil price will all affect companies' propensity to make payments.

The report forecasts that Shell and BP will not cut their dividends, and expects that "lower oil prices will be a positive for many other firms". The dollar's strength will be beneficial, given that "40% of UK dividends are from companies that report in US dollars".

The headline dividend forecast is for dividends of £86.1 billion, with underlying dividends of £83.6 billion (reflecting the fact that Tesco has cancelled its 2015 final dividend, and that Vodafone is a smaller company now).

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.