Weak sterling undermined UK dividends in Q1

UK Equity Income

Speculation over the EU referendum continued to absorb the limelight during May, and investors and companies became increasingly nervous about the potential impact of a Brexit. The FTSE 100 Index fell by 0.2%, while the FTSE Small Cap Index climbed by 0.2%; meanwhile, the FTSE 250 Index posted a monthly gain of 2.3%. The relatively strong performance of the mid-cap index was fuelled by corporate newsflow, including a takeover approach for investment company Alliance Trust and robust first-quarter revenues for security firm G4S . The best-performing FTSE UK industry sectors over the year to date were industrial metals & mining, mining, and industrial transportation. At the other end of the spectrum, banks, automobiles & parts, real estate investment & services, and life insurance were the worst-performing sectors since the beginning of 2016.

The yield on the FTSE 100 Index rose during May from 3.97% to 4.01% , while the FTSE All Share Index’s yield climbed by 0.02 percentage points to end the month at 3.75% and the yield on the FTSE Small Cap Index edged slightly higher during May, rising from 2.94% to 2.96% . However, the FTSE 250 Index’s yield eased from 2.71% at the end of April to 2.67% . In comparison, the yield on the benchmark ten-year UK government bond fell sharply during May from 1.73% to 1.56% .

During May, housebuilder Taylor Wimpey announced an increase to its ordinary dividend payout and a special dividend worth £300 million. Meanwhile, alongside news of disappointing full-year earnings, high-street retailer M&S announced restructuring plans that are likely to hit short-term profits. The company also revealed a 3.9% increase in its final dividend and a special dividend worth £75 million, or 4.6 pence per share.

Global dividends rose by 2.2% during the first quarter of 2016 compared with the previous quarter, according to Henderson Global Investors’ Global Dividend Index , and special dividends doubled year on year. Although exchange rate movements had only a minimal impact in most areas of the world, sterling’s decline against the US dollar had a material effect on UK dividend growth, and UK dividends fell by 5% during the first quarter. Looking ahead, UK dividends are predicted to undergo a “challenging” period, undermined by swingeing dividend cuts from leading companies in the banking and mining sectors, including Barclays, Standard Chartered, BHP Billiton and Anglo American.