Positive energy for dividend growth
Despite persistently high inflation in the UK at the moment, the outlook for real dividend growth from UK equities in 2011 appears positive. We anticipate that, in 2011, total accrued nominal UK dividends (in sterling terms) will be around 13 per cent higher than in 2010.
We believe BP to be the main driver behind this, as we expect it to accrue four quarterly dividends in 2011 compared to only one in 2010. At a company level, around 60 per cent of 2011 dividends have already been announced. Most significant dividend-paying companies have provided clear guidance to investors regarding the dividends they will be declaring during the rest of 2011. We also believe that the US dollar/sterling exchange rate is the key factor in determining the level of 2011 market dividend growth; around 40 per cent of UK dividends are declared in US dollars and are converted into sterling at a later date. If sterling were to weaken back to the 1.45 dollar-to-the-pound level it touched in June 2010, UK market dividend growth would increase to 17 per cent. However, a strengthening of sterling to two dollars-to-the-pound (the level reached in December 2007) would reduce UK market dividend growth to 6.5 per cent – still (just) outpacing inflation.
This dividend growth is driven by a recovery in earnings growth and is achievable given ‘headroom’ in these companies’ dividend pay-out ratios. As UK company earnings declined during 2008 and 2009, we saw companies paying out a growing proportion of their earnings as dividends. The dividend pay-out ratio climbed to around 62 per cent during 2010. Whilst this is high, it is still below the previous peak in 2002 of 69 per cent, and below the level of other challenging periods such as 1995/97 (67 per cent). Currently, the dividend payout ratio for the UK market is around 42 per cent, leaving plenty of scope for further positive dividend surprises and for income-seeking charities this can only be encouraging.
Gemma Woodward is a fund manager at Newton Investment Management
Author: Gemma Woodward
Gemma Woodward is director of investment management for charities at Newton.
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