Capita Registrars has cut its UK dividend growth projection for 2013 from 8% to 6.7%, warning payouts cannot outstrip GDP growth indefinitely.
The group’s latest Dividend Monitor report said investors should be braced for a pullback in UK dividend growth after payouts hit record highs in 2012.
UK firms paid out a record £80.4bn in dividends last year and underlying growth, which excludes special dividend payouts, stood at 8.9%. However, growth in payouts slowed in the second half of the year and this will continue, Capita said.
Justin Cooper, Capita Registrars’ chief executive, said the firm has cut its forecast for underlying dividends from £81bn to £78.6bn, reducing its growth rate projection from 8% to 6.7%.
The impact of special dividends is expected to add £1.9bn, pushing total dividend growth to £80.4bn, flat compared to 2012, said Cooper.
He added the fact dividend growth contracted by 0.2% in the final quarter of 2012 has raised fears the rapid growth in dividends may be coming to an end.
“Strong cashflows and balance sheets, subdued corporate investment, and vociferous calls for income from investors have driven the rapid dividend increases of 2011 and the first half of 2012,” said Cooper.
“But the economy is not strong, and dividends cannot outstrip wider GDP growth indefinitely. Sooner or later, companies must invest in order to keep their profits and operating cashflows rising, and they must protect their balance sheets.
“In addition, we expect some companies to divert more cash to M&A activity which might otherwise have been used for dividends.”
However, James Lowen, co-manager of the £1.4bn JOHCM UK Equity Income fund, said Capita’s forecast is too bearish and dividend growth will not suffer a significant slowdown this year.
Lowen said he has never seen the corporate sector in such great shape, and balance sheets are so strong firms can pursue M&A activity without distorting shareholder value by cutting dividends.
“On the frontline, when we have been visiting companies, we have not been seeing signs of a slowdown in dividends. Instead, corporates have cash coming out of their ears which enables companies to both inject capital into their business and increase income payouts to shareholders,” he said.
“The reason why the FTSE 100 has had such a strong start to the year is because the UK economy is starting to strengthen, and I actually believe growth is higher than the GDP figures are reflecting.”
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