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Tesco's divi cancellation to be offset by stronger dollar earnings for UK plc

Last updated: 21:49 26 Jan 2015 AEDT, First published: 22:49 26 Jan 2015 AEDT

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Tesco's (LON:TSCO) decision to bin its dividend is going to hit British pension funds this year, shares registration firm Capita warned.

The cancellation of the supermarket giant's final dividend is going to put a £900mln dent in the projected pay-out by UK plc in 2015, though Capita still expects £83.6bn in dividends (excluding special divis) to be paid this year, up 5.7% on 2014.

Not only is Tesco not doing its bit to help the plights of widows and orphans, mobile phone network operator Vodafone (LON:VOD) won't be paying such a big divi this year, after slimming down considerably as a result of the sale of its 45% stake in Verizon Wireless.

Stripping out the Tesco and Vodafone effects, Capita predicts growth could top 7% in 2015, thanks in large part to a resurgent US dollar.

Two-fifths of UK dividends are paid by companies that report in US dollars, so a fatter greenback is good news for those companies.

In contrast, not many London-listed companies report in euros, but one of the big payers, Anglo-Dutch consumer goods giant Unilever (LON:ULVR) does, so while income investors can afford to be reasonably phlegmatic about the euro's decline, if the common currency is reduced to the status of being given away free with cereal packets it could make a difference to the pay-outs.

Capita is also not expecting the major oil companies to cut dividends, despite plummeting oil prices.

"UK income investors are very dependent on the giant oil companies, but given their historic performance when oil prices fall to this level, we don’t anticipate they will reduce payouts. However, a lower oil price will prove good news for many listed UK companies, and in turn, investors, helping growth elsewhere in the market,” said Justin Cooper, chief executive of Shareholder solutions, part of Capita Asset Services.

“2014 saw a record year for dividend payouts, but Vodafone’s special dividend masked stalling growth," noted Cooper.

"Under the bonnet, things did not run as smoothly as the headlines suggest. Sluggish profit growth, a spluttering global economy, and the strength of sterling in the early part of the year conspired to put the brakes on underlying growth," he said.

Underlying pay-outs in 2014 from companies in the FTSE 100 were up just 0.7% on 2013 to £70.0bn. Pay-outs from mid-caps – which are less exposed to global economic and currency issues – posted growth that was more than ten times as strong at 8.0%.

The prospective 12 month yield on the UK market is steady at 3.9%. If you can stand the risk and bear in mind the usual caveat that equity dividends are not guaranteed, then buying the UK equity market looks a better investment for the income investor than gilts, where yields on 10-year bonds have fallen to around 1.6% from 2.45% in the third quarter of 2014.

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