What is the outlook for UK dividends?

Jason Stather-Lodge is chief executive of OCM Wealth Management

Stather-Jason-LodgeOCMWealthLooking at the UK income sector, much focus has been on how sustainable it is for leading UK companies to keep paying high dividends and if they can cover these with current net income. This ratio, known as dividend cover, has fallen in recent times to historically low levels in the FTSE 100, mainly due to the amount of energy and commodity companies in the index.

Many of these companies are currently paying out dividends on a ratio that looks unsustainable, unless their base prices recover quickly. Even a pharmaceutical giant like Astra Zeneca, which currently yields 4.6 per cent, is not covering this by the appropriate income. If we matched the dividend yield to what they can really afford, it would see the yield around 1 per cent lower than it currently is. However, given its earnings are expected to fall by around 5 per cent this year, one can see how at risk this is.

While it is fair to say a rebound in both oil and commodity prices would alleviate many of these inherent problems, we are not forecasting a recovery in either, in the medium term. The UK’s largest company, HSBC, which can easily cover its dividend, is now yielding more than 7 per cent given the sell off in bank shares of late, the highest level it has had since the financial crisis in 2008. While it seems this will be maintained for now, you must assume that the growth you have seen in dividends during the past five years of 8 per cent will slow to a lower level.

James Horniman is a portfolio manager at James Hambro & Partners

Horniman-James-2016We live in volatile times. Markets are punishing companies with extended dividends and then punishing them again if they cut them.

We saw this with the miners several months ago and more recently with the banks. HSBC is one of several big names whose dividends are considered stretched by some; its share price has plummeted by 25 per cent in a year as investors have walked away from what they perceive to be a value trap.

Moreover apprehension is spreading. Anything with a yield north of 5 per cent – even if it is a good company – seems to be viewed with suspicion at the moment. In some sectors investors do not believe the yields being offered and that is leaving the income side of running money in disarray.

In chaos lies opportunity. We see value in many utility, tobacco and telecoms stocks, for instance Vodafone yielding a genuine 5 per cent looks attractive, and believe some financials may be starting to turn a corner. We also have reservations about stocks – such as in the pharmaceuticals space – that are generating comfortingly modest yields but trading on high multiples. Investors may be falling into a “reassuringly expensive” trap.

A number of good UK equity managers have suffered in the past year for screwing their courage to the sticking place and focusing on quality and value. These managers are looking not just at dividend distributions, but how companies are reinvesting profits to sustain their businesses (and therefore their dividend distributions) in the long term. We believe these disciplined and rather bruised equity income managers may be about to be rewarded.

David Coombs is head of multi-asset investments at Rathbones

Coombs-David-2011A bastion of income, the FTSE All Share is now going through a tough stretch. After years of ballooning dividends, payouts are under threat.

The expectation of reliably growing UK dividends is nothing new. However, FTSE members’ ability to keep boosting payouts is becoming more fragile. In the past, companies have borrowed at low interest rates while raising dividends. That was fine when revenues and earnings were rising, but recently growth outlooks have become shakier. Some parts of the market, particularly natural resources, have experienced massive falls in revenue, meaning their dividends are becoming dangerously uncovered.

UK companies may start to revise their dividend policies, opting for more conservative forecasts on lower payout ratios. This may extend beyond the embattled oil, gas and mining businesses that have been stung in the past few months. Other cyclical sectors may learn from this over-reach and adjust their dividend strategies. Perhaps they will be linked to profits, or companies may issue more special dividends in good years and hoard cash when times get leaner.

This would make dividend payments more unpredictable, which means more volatility for the index. Higher income payers have a lower beta than the market because their cash flows insulate their share prices from market falls. Remove those regular dividends and price swings may become more erratic.

We prefer companies that are not slaves to interest payments or held hostage by accounts receivable. That’s why we remain focused on companies with high cash flow yields and strong balance sheets; those enterprises that can invest shrewdly in their businesses to boost earnings without relying on economic growth. We like companies that can promise regular cash flows – and deliver them.