Interactive Investor

Investors to pocket $1.16trn in 2016

21st November 2016 14:42

Harriet Mann from interactive investor

As US companies keep a tight lock on dividend payments in the face of growing economic uncertainty, global payouts experienced their worst performance since early 2015 in the third quarter. Britain's decision to leave the European Union hasn't helped either, and asset manager Henderson has just downgraded full-year dividend forecasts.

Paying out $282 billion (£226 billion), the value of global dividends slipped 4% in the three months ended 30 September. Adjusting for special pay-outs and exchange rates, the value slipped 0.3%.

While the pound's devaluation was the main reason UK dividends crashed 14% to $26.3 billion, but even on an underlying basis, massive cuts from big payers like Glencore and Rolls-Royce weighed on UK dividend income - down 2.9%.

However, as around 40% of UK dividends are paid in US dollars - HSBC and Royal Dutch Shell, the world's fourth-biggest dividend payer, are among the largest - sterling weakness has actually been a boon.

Accounting for two-fifths of global dividends, America is the largest contributor of corporate returns, so what happens in the US has a big impact on the global stage. Payouts slipped 7% to $100.4 billion in the third quarter as bosses decided not to repeat the generous special dividends of this time last year.

Strip out specials and underlying growth was still just 3%, the slowest rate of US growth since the financial crisis. This trend hasn't happened overnight, however, but is a result of subdued profit growth and higher debt levels among US companies.

"The most significant trend is the reduction in US dividend growth, now at its slowest since the index started in 2009, "explains Alex Crooke, head of global equity income at Henderson Global Investors.

"However, we do not see this as a major cause for concern, as US dividend growth had to return to a more sustainable rate after a couple of years of double-digit expansion.

"The United States has been the engine of global dividends in the last two years, so the slowdown here helps explain the loss of momentum in growth at the global level."

Peak season

It's also peak season for regions with weaker dividend growth, like China, other emerging markets (EM), Australia and the UK. Generating the lion's share of EM shareholder returns, Chinese dividends are under pressure and the region is on track for its second consecutive year of decline.

Dividends should still grow in 2016 by 0.9% to $1.16 trillion, up 1% on an underlying basisIn a bid to protect balance sheets vulnerable to increasing indebtedness, China is looking to reduce payout ratios.

It makes sense, but is a bitter pill to swallow. Emerging market dividends slipped for their third consecutive quarter to $42.9 billion, down 7%.

The largest dividend payer in Asia-Pacific excluding Japan, over two-thirds of Australia's annual pay-out is distributed during the third quarter. Despite its stronger currency, it was the region's weakest performer with dividends down 6.9% to $18.2 billion. Miner BHP Billiton slashed its dividend by over $2 billion, with Rio Tinto close behind.

Ongoing uncertainty means it's unlikely dividend growth will recover sharply any time soon. That's why Henderson has reduced its expectations for the fourth quarter by $5 billion.

Dividends should still grow in 2016 by 0.9% to $1.16 trillion, up 1% on an underlying basis, but we're warned that further foreign exchange volatility could affect the final figure by "several billion dollars".

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.