Nicholas McLeod-Clarke, manager of the BlackRock UK Income fund, looks back on a record year for dividend payments in the UK.
Given the market environment characterised by low interest rates and swings in investor risk appetite, it is perhaps unsurprising that high yielding stocks have been so popular with investors.
However, we do not believe that equity income as an asset class is currently overpriced. In fact, we are finding many long-term opportunities among companies with a proven ability to maintain and grow their dividends.
In relation to other global markets, we believe UK equities look particularly attractive based on price to estimated 2013 earnings. UK shares are currently trading at 10.6x, compared to 13.1x for the US, 11.3x for Japan, 11.1x for Europe ex UK and 12x for the global equity market as a whole.
The proof there’s still value in UK equity income
The UK market has a long-established dividend culture, which over the past couple of decades has been copied across the globe as international investors began to focus on dividend payments as an important component of total equity returns over the long term.
In the UK itself, dividend payments last year were unprecedented by many accounts. According to Capita Shareholder Services, UK-quoted companies paid out £64.6bn in dividends over the first nine months of the year, which is more than in any of the six years the firm has been doing its analysis.
This is partly attributable to special dividend payments last year, which were a very significant feature, totalling £6.4bn over the period, £800m more than the combined totals of 2008-2010 inclusive, and almost three times larger than the amount paid out in the first three quarters of 2011, which was already a record.
The UK’s dividend culture dates back to the early 20th century, when the UK equity market was not as transparent as it is today and dividends were taken by investors as a sign of quality.
While the market has transformed beyond recognition since then, pressure from large shareholders, such as pension funds and institutions, has meant that long-established, quality companies have continued to distribute a sizeable part of their earnings to investors in the form of dividends.
The recent rise in dividend payouts can be attributed to companies deciding to hold on to their cash rather than reinvest in their businesses in the currently uncertain economic environment.
We expect market volatility to continue for the time being, driven by policy uncertainty, and consequently we continue to maintain our focus firmly on stock selection. In this environment, high yielding stocks should be relatively less volatile as dividend payments have the effect of boosting total returns in times of market uncertainty.
Within our asset class, we retain our preference for companies with high quality franchises that can still prosper in a difficult environment and continue to position our portfolio towards companies with strong market positions, robust cash generation, a track record of consistent growth or a clear catalyst for change, and a solid or improving balance sheet. We expect domestic consumption to remain under pressure and hence we prefer to hold positions in companies with exposure to growth markets.
Many UK-listed companies have considerable exposure to overseas earnings, which can provide good investment opportunities. When backed by strong management teams and good business franchises, such companies are more likely to succeed in a difficult economic environment.
Moreover, they should also be in a better position to expand their businesses through expanding their geographical footprint and product offering, as well as buying other businesses.
For example, one of our favoured companies is UBM, which pays an attractive and growing dividend yield of 3.7%. It is a global live media (leading industry exhibitions) and B2B communications, marketing service and data provider which derives about a quarter of its sales revenue from China and other emerging markets.
UBM is currently undergoing restructuring to focus more on exhibitions with the anticipated sale of its data services division. The proceeds are expected to be invested largely in acquiring exhibition businesses.
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