To judge by some of the headlines generated by the latest issue of the capita UK dividend monitor published this month, you could be forgiven for thinking UK equity income is going through a tough patch but that would be to ignore the underlying data. This is mildly ironic because the key number to focus on in the report is not the headline growth of UK dividends but their underlying growth.
Running an income portfolio – as we do here on The Value Perspective – we need a fairly strong grasp of the underlying income trends in the UK. Over the years, our experience has not always chimed with the main conclusions of the dividend monitor and this is because it has traditionally focused on the headline dividend rate.
In some ways, we can understand this emphasis. Capita does not publish the dividend monitor solely for the good of its health – media coverage is very welcome and journalists do like big numbers. Over the last few years, the biggest numbers have come from the headline rate and the media coverage has duly followed. The only problem is, this is not the right way to think about equity income.
That is because the headline rate will include one-off situations that – as the phrase suggests – tend not to be repeated. One obvious example would be special dividends – the £16.6bn payment expected shortly from Vodafone being an eye-catching case in point – while others would be the effects of exchange rate fluctuations and companies accelerating their dividend payments for tax reasons.
Over the years, these sorts of thing have led the headline dividend rate to outstrip the underlying rate. However, in 2013, which saw fewer special dividends than in the recent past, the headline rate dropped a single percentage point, which is really neither here nor there. Even so, perhaps out of habit, the press has tended to focus on that – in the process ignoring the 6.7% year-on-year rise in underlying growth.
Yet the underlying growth rate is what you should really care about because it gives you a more realistic picture of the income being generated by your investments. Since, for example, special dividends are unpredictable and may not be repeated, you should not be encouraged to think of them as part of your normal income stream.
Clearly, if you were to do that and the amount of special dividends paid by companies were to decline the following year that could have serious implications for your future income. Indeed it is precisely the reason why The Value Perspective’s own auditor does not allow us to treat special dividends as income.
On the subject of what The Value Perspective is and is not allowed to do, it is also worth observing the powers that be would be seriously unhappy were we to express our opinions with the same certainty and with so few caveats as the authors of the dividend monitor. “Total dividends for 2014 will hit £101.1bn,” it proclaims, for example. How can they be so certain they use “will”?
Without wishing this article to turn into an all-out attack on the dividend monitor, there are a couple of other areas where we would suggest its readers need to be careful with how the information is put across. One is the way the report ignores exchange rates – stating, for example, that Astrazeneca, which declares its dividend in us dollars, has decreased its pay-outs for two years on the trot.
In sterling terms that may be so – and, to be fair, the dividend monitor is written for sterling investors – but it is not the whole picture. clearly exchange rates fluctuations are out of Astrazeneca’s control so it would be fairer to note the company actually paid a dividend of $2.30 a share in 2010, $2.55 a share in 2011 and $2.80 a share in 2012 and 2013 – so no decline at all, on an ongoing, like-for-like basis.
Other aspects of the dividend monitor have slightly more potential to be an issue – for example, the report’s forecast that the yield on UK equities for the coming 12 months will be 4.2%. This excludes the giant Vodafone special dividend but apparently includes “a normal level of special dividends”, which has to be a textbook definition of an oxymoron.
Finally, when the report actually talks about underlying growth – how it will be 6.3% in 2014 rather than its provisional forecast of 7% – it observes “a change of this size is not very significant at this early stage of the year because there is still low visibility … by the middle of the second quarter, when the bulk of companies have reported their full-year earnings, we will have a much clearer view.”
Well … ok – but is promising to be a lot more certain about your forecast at a point when what you are forecasting has become a lot more certain not cheating a little? There is much that is useful and interesting in the capita UK dividend monitor but we would suggest thinking carefully before relying too heavily on it either as a review of the past or a guide to the future.