Dividend strains?
June 1st, 2010
The FTSE 100 Index of the largest stocks in the UK yields 3.7%, a useful premium over most world markets. This reflects the uncertainties over the UK economy and sterling. It also suggests trouble with paying all the dividends and getting them to grow at a satisfactory rate.
In 2008 we drew attention to the high proportion of UK dividends that had historically come from the banking sector. We forecast that these dividends would be badly hit by the Credit Crunch, as they duly were. Whilst the top 15 companies by market capitalisation in the FTSE 100 still include HSBC, Barclays, Standard and Chartered and Lloyds, with RBS a bit below them, their dividend paying power has been much diminished overall. Lloyds and RBS are currently making no payments.
The oil companies, dominated by BP and Shell now represent an important part of the Index by market capitalisation and dividend payment. BP’s continuing oil spill in the Gulf of Mexico is not good news given the mounting bills the Group will have to face. The mining companies, including RTZ, BHP, Anglo American and Lonmin are also important components of the Index. Their earnings are heavily influenced by volatile commodity prices which can badly hit dividends in periods of market weakness.
The pharmaceutical, retail and utility large companies provide some better stability in income than the resource and financial stocks. Often these groupings provide good dividend yields by world standards.
Today much of the action in the Index comes from reappraisal of BP as London has its first chance to react to the failure to plug the errant well. It reminds us how accidents and random events can still have quite an impact. The UK corporate sector has taken some bad knocks in the last three years. The heavy dependence on financial activity did damage in 2008. Today one troublesome well off the coast of the world’s richest and most powerful country can upset the whole UK Index.
As always we look beyond individual companies to the overall income and growth potential. The UK’s commodity exposure should yield better income in the years ahead as the world nervously continues its recovery. The FTSE yield does discount quite a bit of the bad news, but the UK remains risky until the budget deficit is brought under strong control and the private sector recovery is well underway and more vigorous than it was in the first two quarters.
