News Column

Financial Mail on Sunday, London, Midas column

August 24, 2014

By Joanne Hart, Financial Mail on Sunday, London



Aug. 24--The pound has slumped in value in the last few weeks, suffering its longest fall since before the financial crisis. But despite its recent slide, sterling is still, by the standards of recent years, relatively highly valued. Even after its recent falls it is still 6 per cent up on the dollar and 7 per cent up on the euro since this time last year.

The longer trend for a stronger pound has been great news for holidaymakers this summer, but it has been tough on Britain's quoted companies and their investors.

Complaints about the effect of the strong pound have been rife in the recent reporting season, as countless firms have blamed sterling for disappointing half-year figures.

More worryingly still for investors, main market dividends paid during the second quarter of this year rose a pitiful 1.2 per cent, from pounds sterling 25.5 billion to pounds sterling 25.8 billion, on the same period a year ago the smallest quarterly increase since 2010.

Looking across the stock market, it is easy to see why currency fluctuations have such an impact. Within the FTSE 100 index, about 80 per cent of profits are generated outside the UK, even though virtually all the companies are based in Britain, and 21 of the 100 report in dollars, with a further five reporting in euros. These include some of the country's biggest dividend payers, such as HSBC bank, drugs group AstraZeneca, and oil giants BP and Shell. Such companies declare dividends in dollars but pay UK shareholders in sterling.

When the pound is strong, this makes a big difference. Capita Asset Services forecasts that dividends in 2014 will be pounds sterling 3.5 billion less than they would be at 2013's dollar/sterling rate.

AstraZeneca, for example, maintained its interim dividend at 90 cents this year. Last year, that translated into a 59.2p-a-share dividend. This year, the figure was 53.1p. AstraZeneca converts its dividends to pence on the day results are announced. But many firms delay the calculation until weeks after.

In Shell's case, for example, chief executive Ben van Beurden reported a 4.4 per cent rise in the quarterly dividend from 45 to 47 cents. That was on July 31. But the conversion will be made only on September 8 and the dividend will not be paid until September 25.

Unless there is a marked change in sterling's fortunes, brokers anticipate a quarterly payout of little more than 28p this year against 28.7p in 2013, even though it has risen in dollar terms. The effect is particularly obvious for firms reporting in dollars, but global businesses which deliver their figures in sterling suffer too.

GlaxoSmithKline, for example, reports in pounds, but half its turnover is in the US, much like AstraZeneca. In the first half of 2014, the drugs group said a strengthening pound had affected operations not just in the US, but in Europe, Japan and emerging markets. Glaxo raised its dividend slightly, but turnover and profits fell compared to 2013.

Analysts hope dividend payments will pick up by the end of the year. Forecasters at Capita suggest payouts for 2014 will rise 3.5 per cent on the year before to pounds sterling 80.4 billion, excluding special dividends.

That is better than the lacklustre 1.2 per cent for the second quarter, but is still well down on recent years. In 2012, dividend payments were 10 per cent up on the year before, as the UK emerged from recession. In 2013, they rose 5 per cent as firms fought to maintain earnings momentum. This year they have the strong pound to blame.

Even the junior AIM market is exposed to the vagaries of foreign exchange movements because it is so international.

Many of its companies are based abroad and more than 160 about a fifth report in dollars.

They do so because their business is largely conducted in the American currency, whether they are gold explorers, oil tiddlers or IT developers.

If revenue and cost are in the same currency, the effect is negligible. Challenges arise if sales are in one currency and costs in another, which is why so many companies have been moaning about sterling lately.

Their complaints have hit share prices. The AIM index has fallen 15 per cent in the past six months and sterling's strength played its part. On the dividend front the effect is more subdued as only 194 firms on the index fewer than a quarter pay a dividend.

Some, such as SimiGon, whose simulation software is used to train pilots and oil rig workers, only began paying dividends this year but do so in cents.

Investors frustrated by the lack of growth should bear in mind that currencies rarely stand still. The pound may be the Popeye of the foreign exchange market now, but next year the dollar may be in the ascendant.

Firms rarely attribute earnings growth to rates working in their favour, but when the greenback rises many UK firms will benefit.

And for investors who really want to reduce currency fluctuations, the FTSE 250 and FTSE Small Cap indices are their best bet. Though not immune from currency movements, they are far more UK-centric than both their larger and their smaller listed peers and derive less than half their revenues from overseas.

The more recent weakness of the pound may continue and provide some relief for investors whose portfolio is exposed to foreign currencies. But investors should be wary of focusing too much attention on currency risk.

Fundamental growth prospects, management determination and drive and the way a firm conducts its business are still more important considerations.

This newspaper adheres to the system of self-regulation overseen by the Press Complaints Commission. The PCC takes complaints about the editorial content under the Editors' Code of Practice, a copy of which can be found at pcc.org.uk.

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(c)2014 Financial Mail on Sunday (London)

Visit the Financial Mail on Sunday (London) at www.thisismoney.co.uk

Distributed by MCT Information Services


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Source: Financial Mail on Sunday (London, England)


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