Opinion: Ftse 100 firms paying out too much in dividends as Brexit looms

Reality is beginning to bite in the Ftse 100 as some high-yielding stocks give up on generous dividends.

Opinion: Ftse 100 firms paying out too much in dividends as Brexit looms

Reality is beginning to bite in the Ftse 100 as some high-yielding stocks give up on generous dividends, writes Chris Hughes

But many British companies are still continuing to offer jaw-dropping payouts when what investors really crave is growth. The dividend culture of the Ftse 100 has long been an oddity.

Its investors have received a far higher proportion of their total returns from income over the last two decades than if they had invested in, say, the S&P 500 in the US over the same period.

With dividends a very British symbol of corporate confidence, boards are reluctant to cut them even when it might be wise to do so. So the Ftse 100 culture has been self-reinforcing.

This year has brought some signs of change. Centrica — which owns Bord Gáis Energy here — slashed its payout last week. Analysts had expected the utility to announce a deep cut, but not by nearly 60%.

Vodafone snipped its dividend in May. And last month, tobacco giant Imperial Brands dropped a commitment to grow its payout 10% annually. Even now, these companies’ share prices look superficially cheap on a dividend basis, with yields — the dividend divided by the share price — of between 6% and 10%. Such ratios are now pretty common in the UK.

The average dividend for the top 15 highest-yielding stocks is worth 9% of the share price.

The standard explanation — that this signals dividend cuts in the coming years — doesn’t fit very well. Take analysts’ predictions for dividends in three years; even with some cuts forecast, the average yield for this group is still 9%. This is especially odd in a low-rate environment. Yields on some government bonds and high-rated corporate debt are negative or zero.

Surely income investors would buy these dividend stocks if the return provided by their annual cash payouts was only 5% rather than double that level? Wouldn’t that provide sufficient compensation for the added risk?

One explanation is international investors just don’t care for yield anymore. Domestic UK income funds probably would be willing to pay more for these stocks and bid down their yields.

This group isn’t driving the market, global investors are. They covet growth and don’t want exposure to the UK until Brexit has clarity. The average expected rise in sales over the next two years for the top-15 yielding UK blue-chip stocks is under 2%. Of course, if the firms aren’t growing, it’s likely because of past under-investment caused by generous dividends.

Cutting dividends now to invest in growth won’t pay off for some time and would only anger domestic investors who actually like the income. Meanwhile, global investors sit on the sidelines and company managers stand frozen like a deer in the headlights.

- Bloomberg

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