UK income funds face a new threat from the eurozone crisis if the pound continues to strengthen against the single currency, leading managers have said.
Following a spate of updates from FTSE 100 giants including Vodafone last week, fund managers said if the pound continues to climb against the euro dividends may have to be cut, impacting funds’ payouts.
Sterling has strengthened significantly against the single currency year-to-date, up 4.3%. Last week it traded as high as €1.26, within a whisker of a three-and-a-half year high, as investors continued to flock to UK assets as part of the ongoing safe haven trade.
Leading companies are now warning they may have to cut payouts to investors because of the run-up in sterling. Vodafone said recently its 7% pa dividend per share growth target is dependent on the pound staying below €1.28.
Fund managers said further gains for sterling would mean UK-listed companies which derive a significant proportion of their revenues from Europe would be worst hit.
According to Standard Life Investments’ Karen Robertson, a number of key income stocks are under threat, with approximately 25% of the UK market’s earnings generated in Europe.
“Vodafone, Kingfisher, Imperial Tobacco, BAT, Diageo, AstraZeneca, Inmarsat, Man Group and Burberry have significant euro earnings,” said Robertson.
Fidelity’s Michael Clark, manager of the top quartile £440m MoneyBuilder Dividend fund, said companies including Imperial Tobacco and Unilever will miss dividend targets if the pound remains strong.
“They will inevitably see growth and dividends fail to reach their targets if sterling continues to strengthen and becomes a safe haven like the Swiss franc was last year,” Clark said.
However, Robertson added around half of the companies listed in the UK will not be as badly affected, particularly the oil majors, as they declare dividends in dollars.
Sterling has recently fallen against the Greenback to its lowest level since January, down below $1.54.
Schroders’ head of UK equities, Richard Buxton, who heads up the group’s £2.9bn UK Alpha Plus fund, said: “In recent months sterling has rallied against the euro so it is very much something to keep an eye on, as it is more volatile than usual.”
Oliver Russ, manager of the Ignis Argonaut European Income and Enhanced Income funds, said as foreign earnings are translated back into a strong currency, this can have an impact on profits, and therefore dividends.
“This is especially the case where payout ratios are high, and coverage ratios are therefore low, as they are unable to absorb the impact.”
Conversely he said European income stocks could benefit from the euro’s weakness. “In Europe, the reverse is more likely the case, as overseas earnings become more
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