UK dividends up in 2011 and 2012 as are profit warnings

January 23, 2012

Dividends up in 2011

According to research published today by share registration company Capita Registrars, dividends are up in 2011 from listed British companies paying out record dividends of £67.8 billion in 2011, a rise of 19.4 percent over 2010.

Dividends rose last year for the first time since 2008 as the number of companies starting or increasing payments outnumbered those cutting them by four to one, with financials the biggest payers and miners the fastest-growing sector.

Special dividends totalled £2.9 billion last year, a fourfold increase from 2010. In total, 19 companies paid special dividends in 2011, compared with 13 in 2010 and nine in 2009.

Financials contributed £13.2 billion, a 12 percent increase from 2010 but a third lower in cash terms than their contribution in 2007. Oil and gas companies trailed financials, accounting for one sixth of total payments.

Royal Dutch Shell was the biggest payer, paying out out £6.7bn. BP paid £1.8 billion pounds more in dividends in 2011 than the year before, when the company cancelled three dividend payments following the Gulf of Mexico oil spill. While miners collectively paid out £4.8bn.

A total of 438 British companies paid dividends in 2011, barely up from 434 in 2010. 373 firms increased, started or reinstated dividends, while 90 slashed or cancelled payments.

Dividend expectations for 2012

Capita expects dividend pay-outs to rise by 11 percent this year, with Dividend Income’s favourite mobile telecom pick Vodafone expected to deliver the most generous payout.

Vodafone will pay shareholders an extra £2 billion in February out of money earned from its stake in Verizon Wireless. The world’s largest mobile operator by revenue will account for almost 10 percent of all dividends paid in the UK in 2012, Capita said. Potentially supplanting Shell’s position as the UK’s top dividend payer this year.

“We are optimistic dividends will make further progress in 2012, unless the euro zone sinks deeper towards collapse and leads companies to retrench at home” said the chief executive of Capita Registars, Charles Cryer.

“Expanding dividends mean the dividend yield on equities looks remarkably attractive at present, although there are clearly risks to capital in holding shares, as with many other comparable asset classes,” Mr Cryer added.

Overall, gross dividend payments are expected to reach £75 billion pounds in 2012, with special dividends a big contributor. However, in real terms dividends are unlikely to outperform 2008 dividends until 2013, according to Capita.

Capita is predicting gross dividend yields for 2012 to be 4.4 per cent, with the FTSE100 yielding 4.5 per cent and the FTSE250 yielding 3.7 per cent.

However . . . profit warnings on the up

Research published today by Ernst & Young revealed a 70 per cent leap in the number of profit warnings from U.K.-listed companies, from 51 in the third quarter to 88 in the final quarter 2011, marking it the biggest jump in a decade.

During the year as a whole, there were 278 profit warnings, compared to 196 the previous year.

Profit warnings in the final three months of last year from the likes of retailer Mothercare and Premier Foods pushed the proportion of listed companies who put out warnings in 2011 up to 14 per cent, the highest since the financial crisis first started in 2008.

At 14%, the proportion of listed companies putting out warnings in the fourth quarter reached its highest level since 2008.

As cash-strapped customers curbed their spending, retail was the worst-hit sector, with 39 profit warnings issued last year, more than the whole of 2009 and 2010 combined.

But Alan Hudson, head of Ernst & Young’s UK restructuring practice, said that although consumer-facing sectors had been hit hard by the sharp fall in disposable income, there were still successful companies across these sector that were performing well.

The software and computer services sector issued 31 warnings, the highest number since 2008, with a fifth of the sector cautioning on profit during the course of 2011.

“Both are reliant on the vagaries of spending in their end markets – primarily business and the public sector – and both are therefore highly sensitive to rising levels of uncertainty or falling levels of activity in the broader economy,” said Mr Hudson.

He added that the sharp rise in warnings across all sectors demonstrated that 2011 was a tough year for companies and that 2012 was likely to continue in the same vein with the gap between the winners and losers widening.

“Many businesses are still expanding profitably, but others remain moribund by debt or defunct business models, unable to build value or gain momentum in these challenging economic conditions,” he added.

Profit warnings in the first weeks of the New Year have come primarily from companies vulnerable to contract and order cancellations, as customers wait for more economic certainty before committing to further significant outlays, said Mr Hudson

“Companies in industrial, IT and support services sectors have proved vulnerable to contract delays in the past and further profit warnings are likely from these sectors until the political and economic outlook stabilises,” he added.

Profit warnings on the up- expect analysts to downgrade their expectations

I reiterate: “As evidenced by the sharp jump in the number of warnings, 2011 was a tough year for many companies and this year is likely to continue in the same vein with the gap between the winners and losers widening,”

“Creditor patience cannot last forever and as growth becomes increasingly elusive, we expect further rounds of restructuring in the year ahead.”

The upward trend of profit warnings may continue this year if European finance leaders don’t resolve the sovereign debt crisis or growth in China slows or demand from the U.S. weakens

What does it all mean for us?

If profits are taking a “dip”, during the first half 2012, taking with them the share prices of high quality dividend paying companies to historically undervalued levels, we may well have some nice buying opportunities ahead.

Currently, the projected 4.4 percent dividend yield for 2012 clearly highlights the attractiveness of equities at a time when yields on government bonds and other assets are low.

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