Capita UK Dividend Monitor Issue 15

Executive summary
Q  1 dividends total 14.1bn, compared to 18.8bn in Q1 2012 H  eadline dividends fall 24.8% in Q1 compared to 2012, but the figures are distorted by one-offs B  ig special dividends in Q1 2012 were not repeated, and some companies changed the timing of their payouts, making the year on year comparisons unusually unfavourable A  djusting for all the one-off factors, underlying dividends increased 6.1% O  n an underlying basis, cyclical sectors performed better than defensive ones, increasing payouts 8.7% compared to 2.8%. T  aking one-offs into account, the oil and gas sector showed the strongest underlying growth, while the giant pharmaceutical and small technology sectors were the weakest 1  05 firms raised, commenced or reinstated dividends compared to 22 who cut or cancelled them, a healthy 4.8:1 ratio F  TSE 100 stocks paid out 13.1bn, down a headline 25.9% year on year, while the FTSE 250 paid out 765m, a headline decline of 16.2% O  n an underlying basis, FTSE 100 dividends outperformed the mid-caps rising 6.7% compared to a fall of 6.0% Y  ields fell across all major asset classes in the first quarter A  s share prices rose and dividend growth slowed, the prospective equity yield for the next twelve months fell to 4.0% from 4.5% three months ago W  e leave our forecast unchanged at 80.5bn for the full year at a headline level, which includes a 1.9bn estimate for special dividends O  ur underlying forecast is unchanged at 78.6bn W  e see potential downside risk in our forecast, particularly for unpredictable special dividends
2
bn

UK dividends
85 80 75 70 65 60 55 50 45 40
2007 2008 2009 2010 2011 2012 2013e

Regular Dividends

Special Dividends

First quarter dividends

18

15

12

bn

Q107

Q108

Q109

Q110

Q111

Q112

Q113

Regular Dividends

Special Dividends

Special dividends
8 7 6 5 4
bn

3 2 1 0
2007 2008 2009 2010 2011 2012 2013e

Introduction

The economy is unlikely to have shown very much progress in the first quarter, though there are glimmers of renewed activity here and there. Nevertheless, the first quarter was marked by continued strength in the stock market as the FTSE All Share climbed 7%, taking investors total returns for the quarter to 8%. For income investors, the changes in the fourth quarter that heralded higher bond yields fizzled out. The near collapse of Cyprus quickly put the euro crisis back at the top of the agenda. It helped reverse the increase in UK gilt yields, pushing them back below 2%, and restored some of sterlings flagging fortunes as well. Savings rates on cash declined further as deposit takers continued to use the Funding for Lending scheme to supplement their resources, rather than needing to compete for investor savings. Equity yields fell too, as the rise in share prices in the fourth quarter continued. The UK is still a tough place to find an income.

The first quarter dividend figures confirm our belief that dividend growth will be hard to achieve at a headline level in 2013. There were some big one off factors in 2012 that set the bar very high, but we also detect a slowdown in the pace of underlying growth as well. After the rapid dividend growth of recent years, it is inevitable that payouts will slow to come more into line with the growth in underlying unprofitability. Companies are cash generative, and still reluctant to invest aggressively, but dividends must eventually fall into line with profit growth. The quarterly Capita Registrars Dividend Report analyses the latest trends in total gross UK dividend payments (before 10% withholding tax), sector performance and the biggest companies and updates the forecast for the full year. With grateful thanks to Exchange Data International for providing the raw data feeds.

14.1bn for Q1 2013

Dividends fall 25%, but its all down to one-offs

accounts in the first quarter thanks to 2.2bn each from Vodafone and Cairn energy. By contrast, special dividends in the first quarter of 2013 were merely 157m, with most of this coming from Polymetal International, once again demonstrating the mining sectors penchant for paying out special dividends in boom times. Even though, in our opinion, companies too often designate dividends as special, even when the cash is generated by their normal operations, merely in order to avoid setting the bar too high for regular dividend growth, the Q1 2012 payments were exceptionally large and exceptional in nature, so it is justifiable to strip them out. Total dividends excluding special payments shrank by just 2.7% in the first quarter year on year, far less than the headline total. The rolling twelve month dividend chart separates out special and regular dividends and shows how the specials have affected the picture over the last few years. Secondly, HSBC threw a spanner in the works by paying in December

Special dividends and timing changes distort the picture

UK firms paid out 14.1bn in gross dividends (before 10% withholding tax) between January and March 2013, shrinking dramatically by almost a quarter (-24.8%) compared to the same period a year ago. Last year the total reached a first quarter record of 18.8bn. This was the largest decline since the second quarter of 2009, when the effects of the recession and credit crunch first began to show up as companies either hoarded cash, or simply werent making enough of it to pay out to their shareholders. The apparent collapse in 2013 does not, however, reflect the same serious factors that caused the decline in 2009. There are a number of technical factors at work which have had a big negative effect at the headline level, but which dont represent the underlying trend. In order of magnitude they are: First, 2012 was a record year for special dividends, with most of them coming in the first quarter. UK companies paid 6.8bn in special dividends last year, with 4.4bn of that hitting investors Dividends paid bn H1 H2 Full Year Q1 2007
33.1 30.6 63.7 10.7

1.2bn that would normally come in the first quarter. As one of the top four payers in the UK, a small timing change by this one company is enough to distort the entire UK picture. As we pointed out in our last report, the 2012 dividends were flattered by this payment and it will negatively affect the comparisons for both Q1 2013 and potentially Q4 2013 too (if HSBC returns to its usual payment schedule). Adding that sum back to the Q1 total, and Q1 dividends actually grew 5.3%. Thirdly, a number of smaller firms have also changed the timing of their dividends, most of them delaying payments usually made in the first quarter until the second quarter. The cumulative effect of these other timing changes was to reduce first quarter payouts by around 120m compared to the same period last year. A small handful of firms have delayed their payouts until after the commencement of the 2013/2014 tax year. This may be because the top rate of tax fell from 50% to 45%. Far fewer firms made the change than we

2008
35.1 32.9 67.9 12.6

yoy
5.9% 7.4% 6.7%

2009
30.7 28.2 58.9 13.9

yoy
-12.3% -14.2% -13.2%

2010
29.1 28.8 57.9 13.6

yoy
-5.3% 2.3% -1.7%

2011
34.8 34.4 69.2 15.6
19.5% 19.3% 19.4%

2012
42.4 38.0 80.4 18.8
21.8% 10.6% 16.2%

2013

80.5 14.1

0.1%

UK dividends
85 80 75 70 65

bn

60 55 50 45 40
2007 2008 2009 2010 2011 2012 2013e

expected, however. In 2010, when the 50p tax rate was introduced, 260m of dividends were paid early, almost certainly to beat the tax. This time the value of dividends delayed until after the lower top rate was introduced was around 40m. Tax-paying by companies and wealthier individuals has become a much higher profile issue than it was in the past, and this may explain the reluctance by firms to

amend the timing of their dividends to avoid the old, higher rate. If we take all these three factors into account, the underlying year on year growth rate would have been 6.1% in the first quarter, and would have implied a total distribution 880m higher than in the first quarter of 2012, an adjusted total of 15.2bn.

Regular Dividends

Special Dividends

First quarter dividends

18

15

12

bn

Growth in quarterly dividends - year on year

30% 25% 20% 15% 10% 5% 0 -5% -10% -15%
bn

Q107

Q108

Q109

Q110

Q111

Q112

Q113

Regular Dividends

Special Dividends

Special dividends
8 7 6 5 4 3 2 1

-20% -25% -30%

Q108 Q208 Q308 Q408 Q109 Q209 Q309 Q409 Q110 Q210 Q310 Q410 Q111 Q211 Q311 Q411 Q112 Q212 Q312 Q412 Q113

Rolling twelve month dividends

86 84 82 80 78 76 74 72 70 68 66 bn 64 62 60 56 54 52 Q407 Q108 Q208 Q308 Q408 Q109 Q209 Q309 Q409 Q110 Q210 Q310 Q410 Q111 Q211 Q311 Q411 Q112 Q212

2007

2008

2009

2010

2011

2012

2013e

Regular Dividends

Special Dividends

Q312

Q412

Q113

Sectors and companies

Dividends from cyclical sectors declined 29% in the first quarter, much less than the 21% decline from the defensives. This merely reflects the split of the one offs that are dogging the numbers. Adjusting for the distortions, the cyclical companies increased their payouts by 8.7%, compared to a 2.8% rise for the defensives. At the headline sector level oils, telecoms and banks are affected by the distortions. Financials would have been flat, telecoms would have risen a fairly uninspiring 4.6%, while oils would have put in a very respectable market-beating 12% increase, driven by BP and Shell, with the former contributing the lions share of the growth, an additional 200m compared to the same period a year ago. The strong performance of the basic materials sector (+24%) was due to mining firm Polymetals special dividend, without which, the sector would have risen 10.8%. Apart from the tiny tech sector, the weakest sector was healthcare. It is the second largest sector in the first quarter and paid out 2.7bn this time, second only to the oil and gas firms. However, that was a decline of 2.3% compared to last year, owing to the cut in Astrazenecas final dividend from a gross 1.37 last year to 1.34 this year. The companys new CEO has pledged to divert resources from dividends and share buybacks into restoring the drugs pipeline. Glaxos dividend rose 2.9%,
2009 BP Royal Dutch Shell Astrazeneca HSBC Vodafone 8.6 62% Glaxosmithkline BHP Billiton Imperial Tobacco BT National Grid Scottish & Southern Energy Compass Marks & Spencer Associated British Foods British Land Co 12.1 87% 13.9 2010 BP Astrazeneca Royal Dutch Shell Vodafone HSBC 7.6 56% Glaxosmithkline BHP Billiton Imperial Tobacco National Grid Unilever Scottish & Southern Energy BT Compass Barclays Cadbury 11.3 83% 13.6 2011 Astrazeneca Vodafone Royal Dutch Shell International Power HSBC 7.6 48% Glaxosmithkline BP BHP Billiton Imperial Tobacco Group National Grid Barclays Compass Group Unilever SSE BT 12.6 80% 15.6

keeping it just in line with inflation. The top five companies accounted for 54% of Q1 dividends, reversing the unusual 77% of Q1 2012 caused by the big special payouts. The most notable dividend casualty in the first quarter was Aviva, which shocked the market with a big cut in its dividend. However we wont notice this until the second quarter in the figures, when the new dividend is actually paid. The insurance sector is the fifth largest contributor of dividends in the UK, paying out 4.9bn in 2012, flattered by a 1bn special from Old Mutual. Avivas dramatic dividend cut will knock around 370m off the likely full year total, if the interim is slashed by the same amount.

Rank 1 2 3 4 5 Subtotal bn % of total dividends 6 7 8 9 10 11 12 13 14 15 Subtotal bn % of total dividends Grand total bn

2007 Vodafone Royal Dutch Shell BP HSBC Astrazeneca 5.72 54% Glaxosmithkline Imperial Tobacco BT National Grid Premier Foods BHP Billiton Scottish & Southern Energy Compass Marks & Spencer Associated British Foods 8.7 81% 10.71

2008 Vodafone BP HSBC Royal Dutch Shell Astrazeneca 6.2 49% Reed Elsevier Glaxosmithkline Imperial Tobacco BT BHP Billiton National Grid Scottish & Southern Energy Compass Marks & Spencer Premier Foods 10.3 81% 12.6

2012 Vodafone Cairn Energy Royal Dutch Shell Astrazeneca HSBC Holdings 10.8 77% BP Glaxosmithkline BHP Billiton Imperial Tobacco Group National Grid Barclays Unilever Compass Group SSE BT 16.4 87% 18.8

2013 Royal Dutch Shell Plc Vodafone Group plc Astrazeneca plc BP plc Glaxosmithkline plc 7.6 54% BHP Billiton plc Imperial Tobacco Group plc National Grid Plc Barclays plc Unilever plc Compass Group SSE Plc. BT Group Associated British Foods plc Rolls-Royce Holdings Plc 11.8 84% 14.1

This comes hard on the heels of a 120m cut from RSA for the coming year. The needs of insurance companies to rebuild capital and cope with lower returns on their investments is behind the cuts. In contrast to Aviva and RSA, Standard Life has announced strong results and will pay a 340m special dividend in Q2, offsetting a large part of the impact of Aviva and RSA. Meanwhile, HSBC overjoyed investors with promises of healthy dividend growth, again likely to show up later in the year. Over the next year, investors will earn 5.9bn from HSBC, depending on exchange rates, more than 600m more than over the last year. Investors used to depend heavily on the banking sector for their income. As recently as 2008, banks were the top sector, paying almost a fifth of all dividends in the UK. Now its only a tenth, and only three banks pay dividends at all compared to seven in 2007.

Barclays is tentatively increasing its payouts again, but is distributing a third of the 2008 total. HSBC pays out six times more than Barclays, but still just less than it used to. Only Standard Chartered stands out. A former minnow, it has doubled its dividends since 2007, and is justifiably the sectors darling. Getting the state banks back on their feet and back into private hands should be a priority for the government, though the 25bn extra capital the FPC is demanding banks hold is likely to delay that outcome. Mining companies accounted for 1 in every 12 of all dividends paid in the UK last year, up from 1 in every 23 as recently as 2009, and collectively are the fifth most important providers of income to investors in the stock market. BHP Billiton alone has tripled its payout since 2007 and is the ninth biggest dividend payer in the UK.

But there is a slowdown in dividend growth underway both at BHP and across the wider mining sector given falling commodity prices, rising costs and boardroom upheaval. Underlying dividends were up 7% in the first quarter in the mining sector. The FTSE is heavily exposed to mining stocks, so investors will need to keep an eye on the sector to ensure their portfolios continue to yield the income they need. 139 companies paid a dividend in the first quarter, compared to 159 in the same period last year. The difference is accounted for by a small number of dividend cancellations (6), takeovers, and the timing changes outlined above. 105 firms raised, commenced or reinstated dividends compared to 22 who cut or cancelled them, a healthy 4.8:1 ratio.

Underlying dividends from cyclicals outperform defensives

Oil sector puts in best underlying performance

Pharma and tech show greatest weakness

Q113
2.3bn 7.6bn

Q112 v Q113
10

bn
4 2 0

2012 bn

2013 bn

4.2bn

Top 5 Next 10 The rest

139 companies pay a dividend, fewer than last year Ratio of raisers to cutters a very healthy 4.8:1

Dividends by main sector m Basic Industries Basic Materials Consumer Goods Consumer Services Financials Health Care Industrials Oil and Gas Technology Telecommunications Utilities Total

2007 34 338 1,008 1,047 1,493 1,712 256 2,334 46 1,877 541

2008 38 459 917 2,160 1,618 1,866 279 2,551 113 2,011 599

change yoy 11% 36% -9% 106% 8% 9% 9% 9% 147% 7% 11% 18%

2009 39 746 774 876 2,089 2,508 283 3,770 119 2,051 651

change yoy 3% 63% -16% -59% 29% 34% 1% 48% 6% 2% 9%

2010 40 741 1,212 774 1,708 2,576 327 3,455 135 1,895 705

change yoy 2% -1% 56% -12% -18% 3% 16% -8% 13% -8% 8%

2011 95 1,342 1,212 975 1,805 2,728 431 2,532 102 1,947 2,468 15,635

change yoy 135% 81% 0% 26% 6% 6% 32% -27% -24% 3% 250% 15%

2012 60 839 1,311 932 2,078 2,714 471 5,122 122 4,193 960

change yoy -37% -37% 8% -4% 15% 0% 9% 102% 20% 115% -61%

2013 63 1,043 1,454 1,042 934 2,652 492 3,239 113 2,077 1,022 14,130

change yoy 6% 24% 11% 12% -55% -2% 4% -37% -7% -50% 6% -25%

10,686 12,610

13,906 10%

13,569 -2%

18,802 20%

Cyclical v defensive sectors

Cyclical Defensive

Dividends by sub-sector, m Oil & Gas Producers Pharmaceuticals & Biotechnology Mobile Telecommunications Mining Tobacco Gas, Water & Multiutilities Travel & Leisure Food Producers Banks Fixed Line Telecommunications General Retailers Electricity Support Services Financial Services Aerospace & Defence Real Estate Investment Trusts Software & Computer Services Food & Drug Retailers Media Chemicals Real Estate Investment & Services Beverages Personal Goods Oil Equipment, Services & Distribution Electronic & Electrical Equipment Industrial Metals & Mining Household Goods & Home Construction Industrial Engineering Leisure Goods General Industrials Industrial Transportation Construction & Materials Health Care Equipment & Services Technology Hardware & Equipment Alternative Energy Automobiles & Parts Forestry & Paper Life Insurance Nonlife Insurance Real Estate

Q1 2012 m 5,085 2,712 3,889 839 743 708 461 474 1,582 304 296 253 247 239 153 162 121 94 81 60 56 34 34 37 27 0 16 18 11 21 5 1 2 1 0 0 0 8 31 0

Q1 2013 m 3,200 2,650 1,783 1,017 808 754 580 521 476 294 273 268 259 239 167 163 112 101 88 63 57 43 39 39 29 26 23 21 18 8 5 2 2 1 0 0 0 0 0 0

2013 v 2012 -37% -2% -54% 21% 9% 7% 26% 10% -70% -3% -8% 6% 5% 0% 9% 0% -8% 7% 8% 6% 1% 27% 15% 5% 10% n/a 47% 21% -62% 2% 127% 1% n/a

cash difference m -1,885 -62 -2,106 178 66 46 119 47 -1,105 -10 -23 16 12 0 14 1 -9 7 7 3 0 9 5 2 3 26 7 4 -13 0 1 0 0 0

-100% -100%

-8 -31

FTSE100 v FTSE250
The FTSE 100 paid out 92.5% of the total dividends from UK Plc in the first quarter, less than the 93.9% in the same period in 2012. This reflects the drop in special dividends since then which were disproportionately large in Q1 2012. The top 100 stocks distributed 13.1bn in the first quarter, 25.9% lower than the same period last year. It is, of course, the big special payments from Vodafone and Cairn Energy last year that account for most of the decline, with the HSBC timing change the icing on the cake. If we adjust for the special dividends, then distributions from the FTSE 100 only fell 2%, and once we add back the early HSBC payment, then in fact payments rose by 6.7% in first quarter on an underlying basis. The underlying picture was therefore stronger from the FTSE 100 that it was from FTSE 250, even though the headline figures suggest the opposite. The FTSE 250 contributed 5.4% of the total in the first quarter, while small caps made up the remaining 2%. The FTSE 250 paid out 765m in the first quarter, a decline of 16.2%. The first quarter is a particularly small one for the mid-caps in most years, usually at least roughly half the size of the other quarters, but this year it is smaller than usual owing to the effect of timing changes. All the delayed payments (other than HSBC) were among the FTSE 250. Adjusting for this, and the decline was only 3.2% year on year in Q1. Excluding special dividends, and allowing for the timing changes, the underlying decline in FTSE 250 dividends was 6.0%. This means the FTSE 250 will have much more ground to make up later in the year compared to the large caps in order to meet our forecast.

FTSE100 v FTSE250 - annual growth per quarter

50 40 30 20 10 FTSE 250 FTSE 100

0 -10 -20 -30 -40 -50 -60

Q109 Q209 Q309 Q409 Q110 Q210 Q310 Q410 Q111 Q211 Q311 Q411 Q112 Q212 Q312 Q412 Q113

2013 bn
5.4 2.0

2012 bn
0.9 0.2

13.1

17.7

FTSE100 FTSE250 The rest

FTSE100 FTSE250 The rest

10

Headline decline looks largest for the large caps, but is distorted

Underlying FTSE 100 divis outperform the mid caps

Yield
Income compression took place across all the major asset classes in the first quarter. Government bonds had risen sharply in the fourth quarter, moving back above 2%, but this reversed in the first quarter, partly due to the return of the eurozone crisis as the Cypriot state teetered on the brink of economic collapse. By the end of March, yields were back at 1.8% as investors once again turned to the safe haven of UK assets. Meanwhile, savings rates declined further, with the best instant access accounts paying merely 2%. Banks have found alternative, subsidised sources of capital via the Funding for Lending scheme, reducing the need to compete for retail deposits. In the property market, yields on residential housing slipped 0.1% to 5.3%, though after the effect of running costs that is more like 3.8% to a property investor. Equities also saw yield compression owing to slower growth in dividends, especially at a headline level, at the same time as a rise in the stock market. Excluding equity investment companies, the prospective yield for the next twelve months to the end March 2014 is 4.0% gross, compared to 4.5% at the beginning of the year based on our headline forecast of 80.6bn which includes an estimate for special dividends, (and allowing for continued growth in Q1 2014). The FTSE 100, of course, yields much more than its junior counterpart. The top 100 companies will return 4.1% of their value to their shareholders over the next twelve months. The yield on the mid-cap index of companies dipped to 2.9%.

All major asset classes see yields fall But shares are still the best place to find income

Equity yields shrink to 4%

11

Outlook

No change to forecast for 2013 Headline divis to show no growth at 80.5bn

UK companies are cash rich, sitting on a pile close to 700bn, according to official statistics. Cash continues to accumulate rapidly as investment is off the agenda for so many firms at present. The government has expressed frustration at the size of the UKs corporate war-chest, and would like to see it invested. Companies may even worry that a beady-eyed chancellor may seek to tax unused cash assets. The strength of cash flows and the restoration of company balance sheets after the banking crisis are behind the recent relatively rapid growth in dividends. With companies so wealthy, investors should not fear dividend cuts, but growth in dividends cannot continue indefinitely ahead of the growth in profitability. BHP Billiton is a case in point. It raised its dividend in its recent results announcement, even though profits fell sharply, indicating that the dividend coverage ratio will decline. This is not sustainable long-term. Most companies of course are growing their profits, but the issue of coverage ratios is relevant to all.

UK dividends
85 80 75 70 65

bn

60 55 50 45 40
2007 2008 2009 2010 2011 2012 2013e

Regular Dividends

Special Dividends

We prefer to focus on the underlying dividend forecast as this does not depend on one off events and unusual activities taking place at a company level. We continue to believe there is a modest slowdown in underlying dividend growth underway, though we hasten to reiterate that this does not mean we expect a fall in dividends. Underlying dividend growth in 2012 was 9.2%. Our current forecast implies underlying growth of 8.6% this year. We assume that HSBC will pay a dividend in the first quarter of 2014, rather than two payments in the fourth quarter of 2013. This takes the total for 2013 to an underlying forecast of 78.6bn. Given that growth at an underlying level was just 6.1% in the first quarter, our forecast requires some acceleration through the rest of the year. At this point we are not inclined to reduce our forecast further, having trimmed it in December. The big dividend quarters are the second and the third, with the first and fourth being significantly smaller. Therefore it is harder to draw conclusions about the broader trend from looking at the first

three months of the year in isolation. Last year, which turned out to be a good year, the first quarter was also uncharacteristically weak once we adjusted for special dividends. To make up the ground lost in the first quarter, the next three quarters collectively need to contribute approximately an extra 400-500 million to meet our forecast. While this is achievable, we nevertheless consider the risks to be skewed slightly to the downside for the full year. The big unknown at this point for 2013 is the size of special dividend payments. We have pencilled in 1.9bn for the full year, far less than the 6.8bn paid last year and the 2.7bn in 2011. Our estimate takes the total back more into line with precrisis years, but we acknowledge that this is still quite a challenging target to meet, particularly since there was so little paid in the first quarter. Including special dividends, our headline forecast is just under 80.5bn. Headline dividend growth in 2012 was 16.2%. Based on this forecast, headline growth in 2013 will barely scrape above zero.

Underlying payouts set to hit 78.6bn

12

But risks are skewed to the downside

Share registration and associated services are provided by Capita Registrars Limited (registered in England, No. 2605568). Registered office: The Registry, 34 Beckenham Road, Beckenham, Kent, BR3 4TU. Produced in association with Teamspirit. Capita Registrars accepts no responsibility or liability for any actions/decisions under-taken on the basis of this analysis. Teamspirit 2013 JN6872