Laura Foll, manager on the UK Equity Income & Growth Fund explains why the outlook for UK income investors is improving and how the fund aims to be positioned to benefit from an economic recovery.
- Dividends paid by all UK companies have fallen significantly to date, with some forecasts predicting a drop of almost 40% for 2020.
- While the UK Equity Income & Growth Fund has also suffered from heavy dividend cuts, the larger weighting to domestic companies may mean it is more likely to benefit from a stronger UK recovery.
- There are already signs that businesses are regaining confidence with some resuming dividends and a successful rollout of a vaccine programme would be a powerful ingredient in improving earnings visibility.
2020 was an exceptionally difficult year for dividend payments in the UK, with dividends on aggregate expected to fall by almost 40% versus 2019 levels.1 The Janus Henderson UK Equity Income & Growth Fund has not been insulated from dividend reductions; in the nine months to 30 September 2020, dividends from the fund fell by approximately 50% versus the same nine month period a year earlier. 2 While the fund has less exposure than the FTSE All-Share benchmark3 to large companies that reduced or suspended their dividends (such as banks), it typically has higher exposure to small and medium-sized UK companies, which on average reduced their dividends more than large companies as they sought to preserve cash within their businesses.
Signs that business confidence is improving…
In recent months there have been encouraging signs for dividends, with many companies that had previously suspended their dividends in spring returning to paying. This included companies currently held in the fund such as aerospace group BAE Systems, insurer Direct Line and the engineer IMI. Looking into 2021, UK dividends are expected to recover from 2020 levels but we are unlikely to see a return to 2019 levels, as companies that have been among the top dividend payers such as oil majors Royal Dutch Shell and BP have permanently reset dividends at a lower level.
…but mindful of remaining uncertainties
The largest remaining unknown for 2021 dividend levels in the UK is the banking sector, where at the time of writing (end November) it remains unclear whether the bank regulator (Prudential Regulation Authority) will allow banks to resume dividend payments. This decision is expected in mid-December.
The other key factor in determining 2021 dividend payments is the trajectory for the UK economy. At the time of writing there have been three encouraging late stage COVID-19 vaccine read-outs but there has not been a Brexit deal agreed with the European Union. Dividend payments, while based on historical earnings, are a signal of confidence in a company’s future outlook. If by the time most final dividends are announced in the spring there is a Brexit deal agreed, and the vaccine is being administered at pace, this should inject some confidence into British boardrooms and dividends may likely benefit from this.
Poised for a domestic recovery
The fund, with its typically above-benchmark weighting in small and medium-sized companies has tended to have a higher domestic exposure than the FTSE All-Share Index, which is dominated by multinational companies. Therefore, we believe the fund is positively positioned to benefit from a ‘re-opening’ of the domestic economy, although the reverse is also true if the economic recovery is slower than anticipated. We continue to hold the view that UK companies currently trade at too large a valuation discount compared to long-term averages, as well as against international peers. Recent takeover activity in the UK (including for insurer RSA, which we sold after the shares rallied on a takeover bid in November) suggests that we are not alone in seeing UK valuation levels as attractive.
1Source: Link UK Quarterly Dividend Monitor Q3 2020. Forecast only.
2Dividends paid out by the Janus Henderson UK Equity Income & Growth Fund year-to-date to 30 September 2020 relative to dividends paid out in same nine months a year earlier. Dividends may vary and are not guaranteed.
The fund aims to provide a dividend income, with prospects for both income and capital growth over the long term (five years or more).
3The fund is managed with reference to the FTSE All-Share Index, which is broadly representative of the companies in which it may invest, as this can provide a useful comparator for assessing the fund's performance.