Economists find them mysterious. Academics — judging by the plethora of papers on the subject — fascinating. No surprise then that dividends leave investors divided: either relishing these regular payments or grumbling that management is shirking its duty to invest the funds.
Yet this is a bad time for ambivalence. Dividend flows to shareholders are one of the few attractions afforded by Britain’s shrinking, outdated stock market. Assuming interest rates have peaked, yields on equities are set to become increasingly more attractive.
The absence of Big Tech becomes a virtue for the income investor. Google and Amazon, US tech juggernauts with growth stamped through their DNA, spurn dividends in favour of reinvestment.
With an average dividend yield of 4 per cent, FTSE 100 shares just trump that available on 10-year gilts. Consensus numbers see the former rising to 4.6 per cent next year as bloated profits from oil and gas and utilities are pumped back into shareholders’ pockets. Add in share buybacks — another form of shareholder return, albeit one of which Lex is not enamoured — and NatWest yields 15.9 per cent, calculates Liberum. So, time to dive in?
Immaterial, say Merton Miller and Franco Modigliani, whose work on capital structure deemed the whole thing irrelevant. The late economists might have noted that dividends are baked into the share price. The stock price wilts on passing its ex-dividend date. Also investors can themselves reinvest the funds.
But plenty of investors demur. Witness the backlash when, for example, oil and gas giant BP halved its payout in the wake of the pandemic in 2020, for the first time in a decade. Hong Kong investors were up in arms when HSBC did likewise, under UK regulatory pressure.
People, of course, are not as rational — nor markets as efficient — as theoreticians would have it. You don’t need to be a pensioner to delight at actual cash landing in your account. And you can mitigate future regrets. As academics Hersh M. Shefrin and Meir Statman note, you feel a lot worse selling $600 of stock to buy a TV if the stock subsequently rises than if you’d funded your purchase from a cash dividend.
Still, smart money won’t be swayed. The broader picture is of waning dividends; even in the dividend-loving UK, buybacks are becoming more popular, in some cases as a substitution. After three years of heavy outflows, assets under management in UK income funds are roughly a quarter lighter than they were in 2020, according to Morningstar Direct.
Assets under management (AUM) in large-cap equity funds, by contrast, are down 10 per cent over the same period. This creates a negative feedback loop. Reduced AUM leaves income fund managers with less clout with chief financial officers and thus less scope to push for chunky dividend payouts.
Then there are agency costs, such as transaction fees for reinvesting the funds yourself. Or take taxes alone. The UK’s dividend tax threshold will again be halved in April, this time from £1,000 to £500. That slaps a £506 tax bill on £2,000 of dividend income, calculates Interactive Investor, an investment platform. About 4.4mn individuals face an average loss of £155mn on government numbers.
There is of course a third way: to take dividends as stock. Last May, Barclays ran the numbers back to 1899. Had you — or your beneficent ancestor — invested £100 in equities it would now be worth £152, in real terms. Reinvesting the income, however, would have led that to swell to £31,120.
Performance and pedigree are a drag on London’s IPO market
What the London market needs, mused one banker at an event last year, is one or two sizeable listings where the shares perform strongly. That, he added, “may be fantasy”.
It certainly was last year. Initial public offering activity slipped to more than a decade low globally amid fears of a recession. With US markets at record highs and growing confidence that economies can skirt a slump, 2024 is shaping up better — though not perhaps in London.
Just $120bn globally was raised from IPOs in 2023, according to S&P data, the lowest in at least a decade. Global figures were flattered by buoyant markets such as the Middle East and China. Just $24bn of new shares were sold on the US market, down from $200bn in 2021. Softbank’s Arm accounted for more than a fifth of the total.
London managed just over $1bn, having lost the former UK-listed chip designer to New York. Listing and governance rules are being reformed to boost UK market competitiveness; there are attempts to refocus pools of capital, such as pension funds, on the domestic stock market.
Arm shares, despite ups and downs, are trading well above the listing price. US housebuilder Smith Douglas kicked off this year’s IPO efforts stateside this month; its shares are still about 15 per cent above the listing price.
Longer term, this is more the exception than the rule. An analysis of 1,700 US IPOs over the past decade shows that just 39 per cent of those still listed trade above their listing price. When Lex analysed 400 UK IPOs over the period it found about one-third were higher today.
Figures for the IPO boom year in 2021 make tougher reading. Only 12 out of 100 UK deals where data is available trade above their debut price. That doesn’t include companies such as furniture maker Made.com, which has since folded. The US crop has fared better, with 42 per cent above their listing prices today. Neither cohort has done well overall: the average price was down about 38 per cent in the UK and 33 per cent in the US.
One issue for London may be who is trying to raise money and for what purpose. UK listings are more likely to include a secondary share sale, where existing shareholders sell out. Over the past decade, 40 per cent of London IPOs included this, compared with just 12 per cent in the US.
Investors can be wary of listings that look to take money off the table, rather than raise funds for future growth. Deals in London also came with larger secondary share sales, perhaps to generate a bigger free float. On average, these accounted for a fifth of shares issued, against 5 per cent in the US.
The risk is that quality leads quantity lower. London’s IPO market still appears to be in a vicious circle that will be hard to break.
Lex is the FT’s concise daily investment column. Expert writers in four global financial centres provide informed, timely opinions on capital trends and big businesses. Click to explore
