Markets bet on UK dividend bonanza from weak pound

Mon Mar 11, 2013 10:18am EDT

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* 2014, 2015 FTSE 100 dividend futures seen as best bets

By Toni Vorobyova

LONDON, March 11 (Reuters) - Investors in UK exporters can look forward to bigger dividend payouts over the next two years as a slide in sterling leaves companies with overseas earnings with more cash to return to shareholders.

Sterling is down around 9 percent against the dollar this year and with authorities showing no inclination to stop the slide, miners, oil companies and others are able to squeeze more pounds out of profits made overseas.

UK blue chips generate around 60 percent of their revenues outside Europe, and the prospect of an exchange rate boost to dividends positions them well to attract investors seeking alternative sources of income to replace the low returns on offer from government bonds.

"About 43 percent of the market dividends are paid in dollars, so when the dollar appreciates and sterling declines that clearly gives you a boost," said Simon Gergel, who heads the European value and income team at Allianz Global Investors.

"And that doesn't include companies like GlaxoSmithKline which make most of their money overseas but pay the dividends in sterling. Their underlying operations are overseas so when sterling devalues, the underlying profitability in sterling goes up."

The effect can take a little while to filter through, but markets are already anticipating higher payouts.

The 2014 dividend future on the FTSE 100, which allows investors to make direct bets on the aggregate level of payouts from the index constituents, has risen 5.1 percent in the past month, in contrast to a gain of less than 2 percent in the equivalent contract for euro zone blue chips.

The latest Reuters foreign exchange poll shows sterling staying around current levels versus the euro and the dollar in coming months, but analysts see a greater risk of further weakness than of strength.

Deutsche Bank estimates a 5 percent fall in the sterling/dollar rate would lead to a 2.2 percent rise in FTSE 2014 and 2015 dividend futures through currency effect alone.

British dividend-focused exchange-traded products (ETPs) have seen $80 million of inflows so far this year and an average 9.43 percent increase in net asset value, Markit data shows.

Signs of UK companies' dividend growth outstripping that of euro zone firms are already clear. In the first two months of the year, 58 percent of dividend announcements in Britain have been increases, against 48 percent in Europe, research from Deutsche Bank showed.

"The culture of dividend paying in the UK is much more embedded. Companies are much more reticent to trim dividends on a one-year basis and then bring it back, whereas in Europe companies are much more fluid," said Gergel at Allianz.

Cheered in part by promises of higher future payouts from the companies themselves, including from heavyweight HSBC , analysts are also raising forecasts.

"Over the next 12 months, investors will earn 5.9 billion pounds from HSBC, depending on exchange rates, more than 600 million more than over the last year. That is enough to nudge our forecast for all UK Plc's dividends for the full year up 200 million pounds to 80.6 billion," Justin Cooper, CEO of Capita Registrars, said in a statement.

In the past 30 days, Thomson Reuters StarMine SmartEstimates of British dividends for this year and next have risen by 0.6 percent and 0.5 percent, respectively, while those for the euro zone are down 0.2 percent and 0.4 percent.

Analysts at Goldman Sachs said they had upgraded their FTSE 100 dividend forecasts after a strong dividend season and due to the weaker pound.

"Performance remains strong and liquidity is low, but upside on 2014/15 still looks attractive," they added in a note forecasting a potential rise of 9.0 percent and 17.8 percent, respectively, for the two dividend futures contracts.

However, the exchange rate boost to dividends is not a result of fundamental changes to the companies' prospects so higher payouts should not necessarily be seen as a precursor of stronger earnings growth.

"Clearly an increase in dividend shows a lot of confidence on behalf of the management in the strength of the company. But we strongly believe that you have to look deeper ... at how sustainable dividends are," said Andreas Zoellinger, co-manager of BlackRock's Continental European Income fund.

($1 = 0.6645 British pounds) (Editing by Simon Jessop and Nigel Stephenson)

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