News & analysis
UK dividends reach record high in second quarter, but forecasts revised downwards for 2019
London-listed companies returned a record amount of cash to shareholders in dividends during the three months to the end of June, but investors should be cautious as such growth appears unsustainable. Investors pocketed £37.8bn in dividends in the second quarter, a 14.5% rise on the same period in 2018, according to Link Market Services. This beat the pre- vious record, which was set two years ago, by £4.4bn.
This was driven for a second successive quarter by a weak pound and large special dividends and has made Link rethink its forecasts for the year. Underlying dividends, where special payments are not counted, grew by 5% to £32.4bn. Exchange-rate gains made up almost half of the increase and growth was lower than Link had predicted. Royal Bank of Scotland and mining giant Rio Tinto made large additional pay- ments on top of their regular dividends, while Barclays and Standard Char- tered announced their largest post-crisis dividends, making banks one of the leading sectors in terms of dividends in the second three months of the year.
UK leads the way as demand for Europe’s alternative assets rise
Europe’s alternative assets industry is in “rude health”, according to Preqin chief executive Mark O’Hare, with investment in some asset classes reaching record highs, despite a troubled macro-economic picture. Europe-based alternative asset fund managers held €1.62trn (£1.4trn) in such assets at the end of June. This was a €300bn (£269bn) rise in three years, according to the financial data provider. This growth appears to have been driven by institu- tions based in North America, which own almost half of the non-traditional assets in Europe. Asset owners in the Middle East and Asia are also chasing an illiquidity premium, and diversification on the continent. Hedge funds were the largest alternative asset class in Europe, worth €608bn (£546.7bn) at the end of 2018, which was 9% lower than in the previous year after the sector underperformed.
This was in contrast to private equity, which grew 8% in the first six months of 2019 to €559bn (£502.7bn). The UK is Europe’s largest market for non-traditional assets, with €948bn (£852.5bn) under management.
PPF reports impressive investment performance despite volatility
The top 100 companies saw payouts jump 18.5% in headline terms during the quarter, but the underlying increase was a more modest 5.7%. Based on a weak pound and the high level of special returns this year, Link has upgraded its headline dividend forecast to £2.8bn for 2019. The firm expects the level of specials to continue with £107.4bn forecast this year, a 7.6% rise. Yet it has downgraded its underlying expectations by £500m to £98.7bn. The world economy is slowing and continuing uncertainty around the terms of the UK’s exit from the European Union continue to hang over the markets and will put pressure on companies in the months to come. So the outlook for the year does not look as strong as it did at the start of 2019. Link Market Services’ chief operating officer, Michael Kempe, said: “Investors are being dazzled by eye-catching specials and exchange-rate trimmings, but the UK’s dividend clothes are starting to look a bit threadbare underneath. “As the world economy slows, and a looming Brexit exacerbates the underper- formance of the UK economy, corporate profits are under pressure and that is limiting the scope for dividend growth.
“Q2 marks both the second upgrade this year to our headline forecast and the second downgrade to our underlying one,” he added. “The true picture for div- idends this year is therefore notably weaker than a first glance might suggest.”
6 | portfolio institutional | June–July 2019 | issue 85
The Pension Protection Fund (PPF) successfully navi- gated the volatility that hit the markets in the year to the end of March to produce a strong investment return. The pensions lifeboat grew its investment portfolio by 5.2% during the year pushing the value of its assets £2bn higher to £32bn. This saw the organisation beat its three-year investment return target during the fiscal year.
During the period, the PPF’s reserves fell to £6.1bn from £6.7bn, a result of it helping Kodak’s pension scheme, in what is its largest claim so far. This saw the funding ratio slip by 4.2% to 118.6%. Chief executive Oliver Morley added that a steady investment and funding approach over the coming years will help ensure that it can provide a secure retire- ment for all the fund’s current and future members. “Over the coming years we will continue to provide a valuable service for our members, to maximise value for our levy payers, and to play a worthwhile role in our community as well as the industry. We expect challeng- ing times ahead, but we are confident our funding strat- egy is on course to see us through them.”
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