Monday, February 8, 2010

Drop in Dividends Leaves Pensions Exposed?

Terry Macalister of the Guardian reports 15% fall in share dividends leaves pensions exposed:

British companies paid out £10bn less in dividends in 2009 compared with the previous year leaving pension and other investment funds dangerously dependent on carbon-heavy oil groups, BP and Shell, for a quarter of all such income, new research shows.

A total of £57bn was handed out to shareholders last year, 15% less than in the previous 12-month period, with 202 firms cutting their dividends and 74 paying nothing at all, according to Capita Registrars Research.

The data shows the financial crisis led to a £6bn fall in dividends from the banks, leaving drug, tobacco and oil companies to fill some of the gap.

"The recession has hit dividends particularly hard because companies have not only had to cope with falling profits, but also massive pressure on their ability to finance themselves. Preserving cash has been a top priority," said Paul Taylor, head of dividends at Capita Registrars, who used data provided by the financial information specialists Exchange Data International to prepare the report.

"Much of the banking sector is either in state or foreign hands, while the ability of the remaining independents to pay dividends is severely constrained by the need to rebuild their balance sheets... Among retailers, only the supermarkets have managed to keep the dividends flowing," he added.

Capita points out that investors are now "heavily dependent" on just five companies – BP, Shell, HSBC, Vodafone and Glaxo­SmithKline – for 47% of all dividends, giving those businesses enormous clout in the investment markets and around government.

Yet Shell faces demands from its own shareholders to move away from its controversial tar sands investments in Canada, while the Co-op's investment arm will today unveil plans to oppose BP's involvement in this area.

"The increasing dominance of the oil companies has left investors highly dependent on a few big stocks to provide them with an income," said Taylor. "Oil has fuelled the engine of UK dividends in the last two years. Lower oil prices, tighter refining margins, slower production growth and unfavourable currency trends have put profitability under pressure at the big oil companies and will make it tougher for them to increase their payouts to shareholders. Indeed, the latest news from the oil sector may even mean our forecast for 2010 is optimistic."

Shell reported last week a 75% downturn in profits during 2009. It said there would be no further increase in the first quarter of 2010 as the future looked difficult. BP also gave a downbeat assessment of future trading opportunities.

Capita believes dividend payments from UK companies should recover with the economy over the next year, reaching an estimated £60bn, 5% up on 2009.

Meanwhile, UK companies raised a record £73bn from new equity as banks and other businesses fought to rebuild their balance sheets. "There has been an unprecedented flow of capital from investors to companies," said Taylor.

Investors are also betting on a UK recovery. Daniel Thomas of the FT reports that pension funds pile into UK property:

Pension funds and other institutional investors committed the most money to the UK commercial property sector on record last quarter, in spite of continued fears of a further drop in values this year.

Institutional property funds raised more than £3.2bn last quarter, dwarfing the previous peak of £1.7bn collected in the boom of the market in 2006. This is the highest since records began in 1998.

Official numbers from the Association of Real Estate Funds show that UK unlisted pooled property funds attracted £2.9bn in the fourth quarter on a net basis, much higher than the £400m raised in the third quarter.

The sudden influx of new capital from institutional investors reflects the wider shift in sentiment towards UK commercial property, which has seen a bounce in pricing since last summer after almost halving in value. Retail investment funds have also recently seen record amounts raised to invest in commercial property.

John Cartwright, AREF chief executive, said: "Last year was a volatile year, but it ended on a positive note with record new money coming in to the funds, as well as the final quarter showing extraordinary growth in returns.

"This marks the second quarter of positive net sales, signalling the resurgence in popularity for property funds. Interestingly, while retail investors remain active, we have also seen significant new money from institutional investors who tend to have longer-term investment horizons."

However, the speed of the recovery - which has seen capital values grow by 10 per cent in six months - has led to fears that there will be a second dip in values. These fears have been exacerbated by weak fundamental reasons to invest in real estate, with rents under pressure.

Analysts said these reasons, in addition to pressure from the end of the Bank of England's quantitative easing scheme, may have meant that the "easy money" from the bounce could have been made.

Fund managers, however, say they are investing for the longer term, typically for more than five years, meaning a further dip would not be a disaster.

AREF said the net asset value of the sector had reached £25.2bn by the end of last year, down from £26.2bn the year before.

Gross sales for 2009 were £4.5bn, up from £567.3m in 2008, while net inflows were £3.2bn, a reversal of funds, given net outflows in 2008 of £224.2m.

The UK property market stands to gain the most from all this influx of pension assets looking to scoop up commercial property at attractive prices. Will this be a great long-term investment? That depends on a lot of factors, chief among them, will the world avoid a protracted deflationary episode?

If it does, then it may make sense to pile into UK and US commercial real estate now. If it doesn't then pensions will be waiting a long time before they see any meaningful price appreciation on these investments. The same goes for those incredibly shrinking dividends.

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