Markets

Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.

There's little sign of a big payday so far for British households after voting to leave the European Union. Faster inflation and slowing growth are set to hit before any kind of "Brexit dividend" kicks in. Ironically, though, actual dividends paid by corporations to shareholders have rarely looked this healthy: U.K. payouts just capped their second-best year since 2007 and are set to rise again this year, according to Capita.

It's hard to cheer this news as a vindication of sound management or Britain being "open for business." Almost all of the 5.2 billion-pound ($6.5 billion) increase in dividends paid last year was due to the slump in the pound since the Brexit vote. U.K. dividends are highly skewed towards huge international firms like GlaxoSmithKline Plc and HSBC Holdings Plc, whose payout power is flattered by weak sterling. Moreover, two-fifths of U.K. dividends are denominated in U.S. dollars or euros. This also helps explain why the FTSE 100 index hit a record in December, a milestone which Brexiteer Michael Gove flagged at the time.

Make It Rain
U.K. corporate dividends soared in 2016 as the weaker pound bolstered payouts, according to Capita
Source: Capita

U.K. stocks actually look distinctly wobbly when it comes to justifying big investor paydays. FTSE 100 companies are spending more on dividends than they earn in profits for the second year running, according to Bloomberg data, with a payout ratio estimated at 161.9 percent in 2016 compared with 113.7 percent in 2015. Royal Dutch Shell Plc, BP Plc and Vodafone Group Plc may be returning more in dividends than they receive in profits, according to Bloomberg forecasts.

Yet financial markets are enthusiastically betting that rising company earnings will justify splurging on capital return. FTSE 100 2018 dividend futures are up about 30 percent since the referendum, an even bigger jump than the 24 percent upgrade to next year's consensus earnings-per-share forecasts. The bet is that even if weaker growth and higher prices squeeze the humble consumer, the most generous dividend payers at the top will benefit from rebounding oil prices and weak sterling.

Dividend Dreams
The FTSE 100 2018 dividend futures index is on a tear, leaving little room for disappointment
Source: Bloomberg

These external factors could bring once-battered firms back into the fold: The world's biggest commodities trader, Glencore Plc, is now apparently ready to reinstate a $1 billion dividend after the raw-materials rout tore a hole in its balance sheet and forced it to raise capital. Provided the current market environment holds, a rise in earnings should therefore mechanically bring down U.K. payout ratios while avoiding the need for unnecessary dividend cuts, reckons Henderson Global Investors Ltd fund manager Laura Foll.

It's worth remembering, though, that the current macroeconomic environment isn't plain sailing for everyone, even for those expected to benefit from Brexit. Recent profit warnings from educational publisher Pearson Plc and aerospace firm Cobham Plc -- both of which get most of their revenue from abroad, according to Bloomberg data -- show a weak pound can't mask bad business.

Pearson missed some obvious warning signs from the U.S. educational market, as my colleague Chris Hughes has noted. A basket of problems and a debt overhang at Cobham, meanwhile, meant the company's new management had to reverse a baffling dividend policy that would have seen almost half of the proceeds of a share sale last year returned to shareholders in 13 months, according to Barclays research. The missteps at BT Group Plc that were reported Tuesday are the latest example. 

Weak Pound, Weak Profits
Pearson and Cobham are two examples of firms rolling back their dividends on profit pain
Source: Bloomberg

There are risks ahead to the dividend dream, in other words. More profit warnings could be on the cards. The oil-price rebound may be short-lived. U.K. equities are vulnerable to a strengthening of the pound off historic lows, according to BNP Paribas SA strategist Edmund Shing. Added competitive pressures and a changing interest-rate environment may also see companies change tack and divert funds to investment to gain market share. Reaping the Brexit dividend could get tougher for everyone -- not just ordinary Brits.

(Peter Grauer, the chairman of Bloomberg LP, the parent of Bloomberg News, is a senior independent non-executive director at Glencore.)

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lionel Laurent in London at llaurent2@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net