By Brean Horne of Citywire
Sterling’s decline has been one of the most eye-catching results of last June’s vote, with the pound shedding 20% against the dollar. Although the slump could hurt the British economy in the longer term, it has had provided one notable boon for investors: a record rise in dividends.
Pay-outs, from utilised companies increased by £5.2bn to £11.1bn in the fourth quarter of 2016, with total yearly dividends reaching £85bn – a 6.6% increase annually. And despite a number of emerging headwinds, sterling weakness and a strengthening dollar means 2017 is likely to be another bumper year for dividends, according to Adam Avigdori, co-head of BlackRock’s UK Income Fund.
‘We are still seeing a tailwind from currency. So we do expect that there will be progress for a vast majority of companies in the FTSE All-Share Index this year, particularly those very exposed to the dollar,’ Avigdori.
Income remained concentrated, however, with the top five payers accounting for 38% of UK dividends in 2016, up from one-third in 2015. Shell was the top payer last year, followed by HSBC and GlaxoSmithKline; both Shell and GlaxoSmithKline are major holdings in Avigdori’s portfolio.
Dividends aside, there will be opportunities for active managers. ‘We do expect this year will have some volatility, and as we go through the year we’ll be looking to take advantage of resulting share price dislocation in the long-term.’
Should inflation surge as sterling falls, Avidgori Says, the best chance for investors to weather the storm is to hone in on companies with strong pricing power. ‘What we’re trying to do is focus on companies that they can actually charge a premium for and can keep that price as inflation comes through.’
A number of sectors have traditionally acted as a buffer against inflation, including real estate, mining and oil, and Avigdori predicts commodities are likely to offer strong returns again for income investors. ‘The dividend outlook is going to be good, simply because you’ve got the mining companies that are likely to come back to the dividend list,’ he says.
Rio Tinto announced today it was doubling its dividend pay-out having smashed earnings estimates and Glencore is expected to follow suit soon. Similarly, BHP Billiton could return to the dividend list sooner than later, with its shares offering a forward dividend yield of 3.9%, although oil majors Royal Dutch Shell and BP are now trading without a dividend entitlement as oil prices come under pressure.
In addition to a micro approach to pricing power, Avigdori also stresses the need to assess the larger picture, particularly when deciding which companies might thrive and which might fall behind.
‘We’re going to be thinking about how companies deal with a difficult and uncertain macro environment, and make sure that the companies we invest in have strong strategies and management teams,’ he says. ‘We want companies that are flexible enough to deal with things that are thrown at them.’