DIY Investor Magazine
/
March 2017
40
Job Curtis
City of London Investment Trust, Henderson Global Investors
I’M STILL CONFIDENT IN UK DIVIDENDS DESPITE
UNCERTAINTIES
The main indices (a benchmark representing the value
of a market’s shares or bonds) of UK shares hit an all-
time high at the start of 2017. Many private investors
might be wondering where to use their ISA allowance of
£15,240 before the end of the tax year on 5th April 2017.
On the one hand, you would not want to forego the
significant tax benefits of the annual ISA.
On the other hand, is it prudent to put money in the
stock market after the recent surge in share prices?
The rise in UK share prices since the referendum on
Brexit is logical. It reflects the fall in the value of sterling
or the British pound against overseas currencies. On
23rd June 2016, the exchange rate between the pound
and the US dollar was £1 = $1.49.There has since been
an appreciation of around 18% in the US dollar to leave
the exchange rate at £1 = $1.22. Against the Euro, the
fall in the pound has been 12%.
We believe the fall in the pound is beneficial for UK
shares because around 70% of the sales of quoted
UK companies come from overseas. The value of
these overseas sales (and profits) is boosted by the
devaluation when translated back into British pounds.
In addition, those British companies that export will
have their competitiveness improved although this is
partly offset by other companies, such as retailers, who
will have to pass on, at some stage, the higher cost of
imported goods to their customers.
Given the amount of sales and profits earned overseas
by UK listed companies, a significant number pay
their dividends in overseas currencies (mainly US
dollars). These tend to be the larger companies and
they account for 45% of total UK dividends paid last
year. The value of these dividends paid in overseas
currencies from UK listed companies has risen in
sterling terms as a result of the fall in the pound.
According to the strategy team at Baden Hill Sanlam, a
research provider, ordinary dividends for the UK’s FTSE
All Share Index rose by 4.2% in 2016 over the previous
year. However, without the currency devaluation, total
dividends would have fallen by around 1%.
The other key factor that underpins greater confidence
in UK dividends is the recovery in the prices of
commodities (physical goods such as oil, gold or
wheat). Metal prices rose in 2016 with better than
expect economic growth in China.
Mining companies are likely to restore dividends in
2017 that had been cut in 2016. The oil price benefited
both from global growth and also from determination
of OPEC to restrict some supply of oil production. BP
and Royal Dutch Shell’s dividends are considerably
more secure with the oil price at over $50 BBL when
compared with below $30 BBL reached in the first
quarter of 2016.
