HAMISH MCRAE: We should be relieved that dividends are back

The flow of dividends and share buy-backs is rising, and about time too. Whether this signals the long-awaited switch from the so-called growth stocks to value stocks remains to be seen, but for people relying on dividends to bump up their income it is welcome news indeed. 

The past week has seen a tidal wave of strong results from the ‘old’ corporate giants that dominate the FTSE100 index on the London Stock Exchange. 

Let’s start with a quick and incomplete tally, just to give a feeling for what has been happening. We had Shell increase its dividend by 40 per cent, countering some of the opprobrium it earned last year when it made the first dividend cut since the Second World War. 

City slickers: The past week has seen a tidal wave of strong results from the ‘old’ corporate giants that dominate the FTSE100

Lloyds Bank reported strong profits and has restored its dividend. NatWest, as we now call the Royal Bank of Scotland group, is in decent profit; is paying a dividend; and has announced a share buy-back. Its largest shareholder, Her Majesty’s Government – in other words all of us – should heave a sigh of relief at that. 

Other big dividend payers reporting include the two mining giants, Anglo-American, which announced a share buy-back; and RTZ, which is paying a record dividend. It made a larger profit in the first half of this year than it made in the whole of 2020 and looks like being the biggest single dividend payer this year of the whole Footsie establishment. 

Booze and tobacco did well. Diageo, the largest whisky producer in the world, reported an 18 per cent increase in profits and says it will increase its final dividend by 5 per cent. 

And British American Tobacco, the largest tobacco company, increased its sales by 5 per cent largely on the back of ‘new categories’. It has grown its dividend every year since 1999. 

AstraZeneca, now the most valuable Footsie company at £128billion, had a 25 per cent increase in first-half profits. GlaxoSmithKline’s chief executive, Emma Walmsley, said that its performance was driving it ‘towards the better end of our earnings guidance range for 2021’. The list goes on. 

In short, by any standards this was a good week for UK plc. That is being reflected in the recovery of dividends. Ahead of these results, AJ Bell reckoned that total FTSE100 payments would grow by 25 per cent this year to £67.9billion – though still down on the £85.2billion in 2018. That would give a yield of 3.7 per cent, with cover increasing to 1.83 times earnings, the highest since 2014.

However, a good week for UK plc has not been reflected in a good week for shares. Sure, the Footsie has clawed back above 7,000, but it opened the week at 7,028 and ended at 7,032. Nothing special there. If you take a longer view, nothing special either: it is up 17 per cent on the past year, whereas the Dow Jones is up 33 per cent and S&P 500 up 35 per cent. What should we make of this? First, we have to accept that the UK is out of fashion among international investors and may remain so for some time. 

Second, dividend stocks are out of fashion vis-a-vis so-called growth stocks, mostly high-tech American ones, and that may continue for a while too. There are signs that investors are questioning this. Uber shares are down 14 per cent this year. Amazon has had a bumpy week. But it is far too early to call the end of the tech boom. 

Third, and deeply troubling, there are rich pickings for foreign investors that are experienced enough to look through fashion and spot value. Take the bid for Morrisons. Last week, its largest shareholder, Silchester International Investors, said it was not inclined to support the bid by Fortress, the New York investors. Legal & General and M&G have joined the ‘no’ camp too, and if Fortress does go ahead, it looks as though it will have to pay more. 

There is a price for everything, but had British shares not been so undervalued, the bid would not have happened in the first place. 

Then on Thursday, there was another, though smaller, example of a US company spotting an undervalued UK one. Charles Stanley, one of the oldest members of the London Stock Exchange, agreed to be taken over by Raymond James. The price was a 43 per cent premium over the market. It is hard to argue with that, but the loss of independence for a 230-year-old business makes me feel a bit glum. 

This undervaluation of UK enterprises will correct itself in time. Meanwhile, we should worry about the loss of independence for too many companies – but be relieved that dividends are back.

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