UK companies reduce dividends

Dividend payouts from UK companies are now expected to fall by 6.5% during 2010, according to research undertaken by Capita Registrars and published during August. This decline results from companies cutting or cancelling dividends in order to prop up their balance sheets and ride out the recession.

BP has been a major factor in this drop after it suspended its dividend following the disastrous oil spill in the Gulf of Mexico. The group has estimated the leak has so far cost it more than $6bn (£3.9bn) and has confirmed that more than 30,000 people are now working on the response to the leak. Almost five billion barrels of oil are believed to have leaked into the Gulf of Mexico after the Deepwater Horizon rig explosion in April. The leak was finally stopped last month although the full financial and environmental impacts remain, as yet, unknown.

During the first six months of 2010, UK companies paid almost 10% less in dividends to shareholders than in the same period of 2008 with the banking sector – unsurprisingly – a major contributor to this drop. Household goods and property companies also found themselves under pressure as the recession took hold.

At the other end of the spectrum, however, many companies in defensive sectors such as tobacco and pharmaceuticals, which tend to be more resilient during times of economic decline, found themselves able to increase their payouts.

Nevertheless, amid signs some managements are becoming more sanguine about the outlook for their companies’ profitability and the strength of their balance sheets, some UK companies have reinstated their dividends or increased payouts to their shareholders.

In particular, the UK’s largest insurance group, Prudential, announced higher-than-expected first-half profits during August and raised its interim dividend by 5%. Services company Serco increased its payout by 18.9%, while Admiral Insurance raised its dividend by 1%. Energy engineer Amec increased its dividend by 20% and WPP, the world’s largest advertising company, boosted its payout by 15%.

According to data released during August by the Investment Management Association, UK Equity Income & Growth was the 13th-best selling sector during June. The UK Equity Income grouping, into which the UK Equity Income & Growth sector has since remerged, also experienced positive net retail sales.

At the end of the month, the UK equity market yielded approximately 3.3%, compared with a yield of approximately 2.8% on the benchmark 10-year UK government bond, strengthening the attractions of UK equity income for investors searching for yield.