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Investors gain from fall in Sterling

Monday, March 11 16:27:07

Investors in UK exporters can look forward to bigger dividend payouts over the next two years as a slide in sterling leaves companies with overseas earnings with more cash to return to shareholders.

Sterling is down around 9 percent against the dollar this year and with authorities showing no inclination to stop the slide, miners, oil companies and others are able to squeeze more pounds out of profits made overseas.

UK blue chips generate around 60 percent of their revenues outside Europe, and the prospect of an exchange rate boost to dividends positions them well to attract investors seeking alternative sources of income to replace the low returns on offer from government bonds.

"About 43 percent of the market dividends are paid in dollars, so when the dollar appreciates and sterling declines that clearly gives you a boost," said Simon Gergel, who heads the European value and income team at Allianz Global Investors.

"And that doesn't include companies like GlaxoSmithKline which make most of their money overseas but pay the dividends in sterling. Their underlying operations are overseas so when sterling devalues, the underlying profitability in sterling goes up."

The effect can take a little while to filter through, but markets are already anticipating higher payouts.

The 2014 dividend future on the FTSE 100, which allows investors to make direct bets on the aggregate level of payouts from the index constituents, has risen 5.1 percent in the past month, in contrast to a gain of less than 2 percent in the equivalent contract for euro zone blue chips.

The latest Reuters foreign exchange poll shows sterling staying around current levels versus the euro and the dollar in coming months, but analysts see a greater risk of further weakness than of strength.

Deutsche Bank estimates a 5 percent fall in the sterling/dollar rate would lead to a 2.2 percent rise in FTSE 2014 and 2015 dividend futures through currency effect alone.

British dividend-focused exchange-traded products (ETPs) have seen $80 million of inflows so far this year and an average 9.43 percent increase in net asset value, Markit data shows. Reuters