“It was the best of times, it was the worst of times,” - a quote from Charles Dickens that might apply currently to UK shares.
On the one hand, the Profit Warning Stress Index calculated by business consultancy group EY hit its highest level for two years in the third quarter of 2018.
On the other, the latest UK Dividend Monitor from Link Asset Services indicates dividend pay-outs hit a record amount for a third quarter in the July-September period.
Of course, the two record-breaking events are not mutually incompatible but it may just be that risk-averse investors should consider a flight to quality from this point.
Profit Warning Stress Index
EY reported that 68 London-listed companies issued profit warnings in the third quarter, which is actually 9% lower than in the same quarter of 2017; however, in calculating its stress index, EY measures the percentage of companies that have issued profit warnings in the latest 12 month period against previous quarters, and it this level – an index score of 72 – that is the joint highest in two years.
According to EY, 39% of those companies that had issued profit warnings in the third quarter had issued warnings in the preceding 12 month period, which does not quite validate the slightly jokey adage that profit warnings come in threes (like London buses) but it does point to a fairly high probability that a company’s first profit warning won’t be its last.
In the first three quarters of 2018, UK quoted companies issued 199 profit warnings, up 2% year-on-year.
Should there be any doubt that Britain’s High Street retailers are having a tough old time of it – cue Banarama’s “Cruel, Cruel Summer” on the virtual turntable, here – EY reports the number of warnings from the FTSE General Retailers hit a seven-year high during the quarter, with eight warnings.
The only other sectors to come close to retailers in terms of profit warnings are general financials and media companies, where around 20% of the companies in each sector issued warnings.
Retailers, of course, are notorious for blaming the weather – too hot, too cold, too changeable, too autumnal in summer, too summery in autumn, too rainy, too dry – and it is fair to say that it has been a strange old summer this year, which accounts for why half of the retail sector’s warnings in the quarter put the blame on the weather.
For the economy as a whole, however, it appears that rising overheads are the main reason for companies failing to do as well as budgeted.
Companies in the FTSE Travel & Leisure sector were particularly vocal about increasing costs and rising red tape.
Seven companies from the sector issued warnings in the third quarter, which was the highest for 18 months. A quarter of the sector’s constituents have warned on trading in the last 12 months.
Gambling companies have been particularly hard hit this year with five profit warnings so far versus two in the whole of 2017.
“Most warnings are still coming from the consumer side of the economy but pressure is building elsewhere, as domestic and global uncertainties increase,” EY said.
Never mind the profit warnings, count the dividends
Those companies doing well are doing very well, it seems, and are in the mood to reward shareholders.
According to Link Asset Services, dividends in the third quarter (excluding special dividends) rose 6.9% in the third quarter to an all-time quarterly record of £31.6bn.
Including the specials, UK PLC paid out £32.3bn in the third quarter, up 4.1% year-on-year.
Banks and mining companies did much of the heavy lifting – the mining sector overtook the oil sector as the biggest payer – while it should come as small surprise that “retail stood out as a weak spot”, according to the report.
“Most sectors saw flat or growing payouts; where there were declines these were mainly due to isolated companies, or one-offs,” the report said.
“Banking dividends are moving up a gear, just as the roaring engine of mining dividends is getting set to slip back to neutral,” declared Just Cooper, the chief executive officer of Link Market Services.
“Commodity prices have recovered some of their poise after trade-war-induced wobbles, but the easy profit gains from higher prices have passed for now, and earnings are beginning to disappoint analysts. The banks, by contrast, have for the most part finally slipped the noose of regulatory fines, and shucked off the burden of lengthy restructurings. With interest margins now improving, they have headroom to pay their shareholders more in dividends,” he added.
For the year as a whole, and including special dividends, Link Asset Services predicts dividends will fall just short of the £100bn mark at £99.8bn, which would be an increase of 4.8% on 2017. Link Asset’s latest prediction marks a £1.1bn increase on its forecast at the time of the second quarter report.
“2018 dividends may not quite breach the £100bn milestone, but it’s going to be a close-run thing. Investors are getting ready to celebrate another record-breaking year for dividends,” Cooper predicted.