News Column

Pounds sterling 3.5bn forecast to be wiped off this year

August 15, 2014

By Ruth Sunderland, Daily Mail, London



Aug. 15--The strong pound has taken a heavy toll on corporate profits, wiping around pounds sterling 1bn from the bottom line of UK plc, as a string of blue-chips including Rolls-Royce, BAE Systems and Diageo count the cost.

And a less noticed side effect of sterling's strength is that it has taken a big bite out of the dividends paid to British investors. The FTSE 100 index, often billed as a barometer for the UK's premier league companies, is home to a cadre of multi-national companies.

Many of them do little or no business in the UK and a surprising proportion about a fifth declare their dividends in dollars, not pounds. Those dollar-denominators accounted for pounds sterling 31.5bn of dividends in the past year, or 36pc of the FTSE total.

Dollar divis have to be translated into sterling, usually a few days before their 'pay date'.

When the UK currency is strong, this means British shareholders receive less than they would have done if it had remained constant. Over the past six months, this has burnt a big hole in FTSE 100 dividend payouts.

Analysis by Capita Asset Services for the Daily Mail shows that an investor who had a notional pounds sterling 10,000 in each of the dollar-denominators would have been nearly pounds sterling 330, or 9pc, worse off than if the pound had remained static.

'The strength of the pound is being felt in UK investors' pockets,' says Justin Cooper, chief executive of shareholder solutions at Capita Asset Services.

'Dividend growth from the largest global firms looks much less attractive as sterling soars and they struggle to increase what they return to shareholders.'

To make matters even worse, the companies affected number among the biggest dividend distributors on the index.

Four of the top five HSBC, BAT, Royal Dutch Shell and BP pay in dollars. In the case of Britain's top payer, international bank HSBC, pre-tax profits at the half-year stage were down 12pc and the dividend was held flat in dollar terms.

That means British shareholders will see their cheques shrink by around 8pc when they drop through the letter box in October.

'Income investors have several more months of pain to endure before the effect of the strong pound begins to dissipate,' says Cooper.

But the impact is not confined to the dollar denominators. A number of companies such as GlaxoSmithKline, the fourth-biggest payer in Britain, declare their numbers in pounds, but earn large chunks of their revenue in dollars.

The value of those income streams has been depressed in sterling terms, with a knock-on effect on profits and potentially on dividends, though managements have discretion to maintain payouts to absorb some of the effects.

Possibly the single largest blow to British investors came from Vodafone's special dividend, paid out earlier this year after the sale of its stake in US operator Verizon.

Between the announcement in September that it planned to distribute $26.5bn gross, and the time of the payment in February, the exchange rate had moved from $1.55 to the pound to $1.66.

That meant the sterling value of the dividend plunged from pounds sterling 17bn to pounds sterling 15.9bn a difference of pounds sterling 1.1bn.

As if that were not painful enough, there is also the euro factor. The pound ended the second quarter 6.8pc stronger against the euro than a year earlier. FTSE firms that declare dividends in euros are fizzy drink bottler Coca-Cola HBC; BA's parent company International Airlines Group, Mondi, the paper and packaging group; consumer giant Unilever; and building materials company CRH.

Assuming there is no further rise in sterling, a total pounds sterling 3.5bn is forecast to be wiped off dividends this year.

The 'diminishing dollar dividend' effect on small shareholders investing through income funds or their pension may be even stronger than these figures suggest. That is because the FTSE 100 is a highly concentrated index, and the top 15 dividend payers account for more than 61pc of the distribution. Income funds may well have heavier holdings in these stocks.

Currency is also an obvious consideration for investors in US or European equity funds, popular with those seeking geographic diversification.

The hope is that the worst of the dollar dividend thrashing might soon be over. The pound has weakened against the dollar recently and slipped again this week after Bank of England governor Mark Carney signalled any rise in interest rates would be small and gradual.

Income seekers looking to dodge dollar damage can look at companies that focus on the UK economy, such as retailers, housebuilders and real estate groups.

And it may be scant consolation, but the yield on shares, at around 4.1pc, is still better than the miserly 1.3pc on a cash deposit.

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(c)2014 Daily Mail (London, )

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Distributed by MCT Information Services


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Source: Daily Mail (London, England)


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