Newton Higher Income fund manager Tineke Frikkee explains how dividends can possibly grow 22% in 2011.
After three years of declining UK market dividend income, we are likely to see market dividend growth between 8% and 22% in 2011. Our growth forecast is sensitive to BP’s dividend decision in early 2011 and the dollar-pound exchange rate.
If BP reinstates dividends at consensus level, 10.5 cents per quarter, at $1.56 to the pound, 2011 market dividend growth is likely to be around 14%. If BP reinstates its 2011 dividends at previous levels at $1.56 to the pound, market dividend growth of around 18% could be achieved.
The dollar-pound exchange rate is important for the forecast range of dividend growth as more than 40% of UK dividends are declared in dollar. If sterling was to weaken to its recent low of $1.43 to the pound, and BP were to reinstate dividends to previous levels, UK market dividend growth could reach 22%.
Other contributors to 2011 UK market dividend growth include HSBC, Vodafone, British American Tobacco, National Grid, Anglo American, GlaxoSmithKline and XStrata. HSBC is the largest company in the UK in terms of market capitalisation, at 7.4% of the FTSE All Share index, and around 7.8% of expected UK market dividend income in 2011. Vodafone’s market weighting is 5.1% and we expect the company to contribute 8.3% of all UK market dividend income in 2011.
British American Tobacco’s weighting in the FTSE All Share is 2.9%, and we forecast it will contribute 4.1% of 2011’s UK market income. Following the step-down in dividends as a result of its recent rights issue, National Grid is set to grow its dividend by 8% per year.
Having paid no dividends for two years, Anglo American has recently recommenced its dividends. Xstrata paid no dividends in 2009, but continues on a strong dividend growth path.
Tineke Frikkee is portfolio manager of the Newton Higher Income fund
