Weak pound adds £6bn to UK company dividends

Investors in UK companies can expect to receive an additional £5.7bn of dividends this year because of the pound’s slide against the US dollar.

The extra cash underlines how a weaker UK currency benefits many British companies that earn a large share of their income abroad, as well as sterling-based investors whose portfolios have international exposure.

The pound hit a record low against the dollar last month following the UK government’s ill-fated plans for extensive and unfunded tax cuts. Even after recovering, it is still down 15 per cent this year.

But the pound’s decline will deliver a record boost to dividend income for British investors, increasing the sterling value of payouts from London-listed companies by almost 6 per cent this year, according to a widely-followed industry report by fund administration group Link.

“The exceptional weakness of the pound [has] enormously flattered the figures,” said Ian Stokes, managing director at Link Group. “As the dollar has soared in value, the translated value of dollar dividends has received a boost.”

Around two-fifths of UK-listed businesses declare their dividends in dollars or euros. Those income streams are now worth much more than they were last year, as the value of sterling has slipped to multi-decade lows.

The fall in sterling over the longer term stems partly from the dollar’s ascent. The greenback has been propelled higher by the Federal Reserve’s aggressive tightening of monetary policy this year. Higher interest rates typically draw in foreign capital as investors seek out more attractive returns.

The dollar has also been supported in recent months by its traditional status as a haven asset during times of economic and market stress.

But a weak pound also reflects investors’ worries about the future trajectory of the UK economy.

Still, a weaker currency does offer some silver linings for British investors. Sterling-based investors who own overseas assets, such as US stocks, have seen their portfolio hold up better during this year’s market sell-offs as the value of foreign assets increases in pound terms.

Dividend payouts — a crucial source of income for many retirees, pensions and charities — are another area where a weaker pound can be helpful to shareholders.

Companies like Shell and HSBC, which generate substantial overseas revenues, denominate their payouts to shareholders in dollars. But for investors who opt to take payment in sterling, the exchange rate uplift totalled £1.9bn in the third quarter, according to Link, which forecast a larger boost in the final three months of the year.

“On current trends, the boost in the fourth quarter is likely to be even larger and will bring an exchange-rate impact for 2022 roughly as big as during the global financial crisis,” Stokes said.

Link upgraded its forecast for total dividend payouts from companies listed on the main market of the London Stock Exchange, excluding investment trusts, to £97.5bn, an increase of 5.5 per cent from last year, supported by currency effects and higher payments from banks as well as oil and gas companies.

But UK payouts remain lower than pre-Covid levels, as many businesses took the opportunity during the pandemic to reset the amount of cash they return to shareholders.