2016 was an unusual year for dividends. We started the year rather pessimistically, factoring in billions of pounds of dividend cuts from some of the UK’s largest companies, and zero growth for many more. These duly took their toll, but the second-largest haul of special dividends on record, with the added alchemy of huge exchange rate gains following the pound’s devaluation in the summer, ultimately turned a rather leaden year golden.
UK dividends ended 2016 with a bang, soaring 11.7% in the last three months of the year to reach £16.6bn on a headline basis, comfortably a fourth quarter record. For the full year, they were 6.6% higher at £84.7bn, exactly in line with our revised forecast, made following the pound’s fall.
Exchange rate effects obviously depend on which currency your investments are based in. We measure UK dividends in sterling, though of course many investors are from overseas. Sterling-based investors benefited strongly as the dividends of multinationals were translated at more favourable exchange rates, while foreign investors lost out on dividends paid in pounds by companies with operations entirely or mainly based in the UK.
Of the £5.2bn headline increase in dividends in 2016, £4.8bn was due to the pound’s weakness. This takes much of the shine off the rise in payouts, as it shows that companies were not increasing dividends on the back of strong profit growth. Without the fall in the pound, UK dividends would only have been 0.6% higher in headline terms.
Moreover, special dividends of £6.1bn more than doubled year-on-year. This added an additional £3.3bn to the headline total.
The underlying total, which excludes special dividends, rose 2.6% for the full year, reaching £78.5bn. Without the exchange rate gains, underlying dividends would only have reached £73.7bn, 3.7% lower year-on-year.
UK investors can, of course, justifiably celebrate the headline numbers. The trends beneath the surface show, however, that dividend growth in the UK is still rather hard to come by.