Anyway, the subject of UK dividends has been to the fore of late, if for no other reason than it’s hard to recall a time when PE ratios and yield metrics have been so favourably juxtaposed on the main UK indices. At the time of writing, the respective measures for the FTSE 100 were 14.2 and 4.2 per cent. Compare that, say, to where we were a year ago (29.6 and 3.6 per cent), or against Germany’s Dax (14.5 and 2.9 per cent).
A recent article in the Financial Times by Kate Beioley pointed out that investors had effectively missed out on a record surge in profits from UK companies due to a post-referendum exodus from UK equity funds. Hopefully, the stock-pickers among us kept the faith. Much of the profit surge, complete with an accompanying step-up in cash flows, was the result of sterling weakness and its effect on revenues derived from other currencies, notably the US dollar and the euro. At one stage, sterling had lost 17 per cent of its value against the dollar (peak-to-trough) following the EU referendum, and 15 per cent against the single currency.
Of course, this is well-worn territory, but it’s worth pointing this out because recent events are likely to have a bearing on the profits and cash flows for some of the principal income generators on the UK equity market. This time last year, after failing to sustain a breach in what some City analysts saw as a technical barrier at the $50 a barrel mark, the price of Brent crude headed south through May into June. Underlying fundamentals, ergo the expansion of US shale production, were hardly supportive, either. But a year on, with Venezuelan production down by 600,000 barrels per day, and Donald Trump tearing up the Iranian nuclear deal, the price has just edged north of $77 – its highest level since November 2014. The positive effect on revenues and cash flows for the oil majors shouldn’t be downplayed given the broader sector remained the largest contributor to UK dividends in the first quarter, according to the Link Asset Services’ dividend monitor. But the boost provided by higher prices needs to be set against potential US dollar weakness, due to its inverse correlation to the oil price. And the latest market updates suggest that the oil majors will prioritise free cash-flow generation and building cover on existing pay rates.
Beyond ‘big oil’, last week’s announcement that Royal Bank of Scotland (RBS) had agreed to a $4.9bn (£3.6bn) civil settlement with Federal authorities in the US over historic mis-selling of residential mortgage-backed securities rekindled speculation that the state-backed banking group would return to the dividend circle. Our banking correspondent, Emma Powell, agreed that this was a "low-ball" settlement, but counselled caution, pointing out that “generating income at a decent margin in such a feeble interest rate environment is a tough task”.
Nevertheless, Justin Cooper, chief executive at Link Market Services, thinks the “banks and financials look quite good”, based on the first-quarter dividend analysis, while “the mining sector is seeing strong profit growth, too, which should feed into further increases in payouts”. But Mr Cooper believes investors should manage their expectations regarding one-off returns, as “it would be a surprise to see special dividends hit the exceptional heights of the last two years, so we do forecast a modest drop this year”.
