The weak pound has been great news for UK investors. With FTSE 100 companies generating up to 77% of their earnings overseas, according to Capital Group, the value of their overseas earnings have been worth up to 20% more once converted back into soggy sterling.
UK-listed, internationally focused companies such as Unilever, Diageo, GlaxoSmithKline, AstraZeneca, HSBC, Standard Chartered, Rio Tinto, BHP Billiton, Aviva, Prudential, ARM Holdings, Burberry and Reckitt Benckiser have all fed on sterling weakness. And so have UK investors.
Your Income Is Now Falling
With the pound now trading at $1.71, up from $1.51 just 12 months ago, and rising from €1.15 to $1.26 against the euro over the same period, that positive trend is going into reverse. Sales may still hold up, largely because Britain does little low-margin manufacturing, which is at the mercy of currency fluctuations. The companies listed above, and other big FTSE 100 exporters such as BAE Systems and Rolls-Royce, compete on quality more than price. But currency headwinds could blow their earnings away, once repatriated to these shores.
This is a big deal for UK investors, given that roughly 40% of FTSE 100 dividends are priced in dollars, while Unilever pays in euros. That means your income is falling in real terms, as the pound in your pocket rises.
The 4.2% yield paid by Anglo-Dutch consumer goods giant Unilever (LSE: ULVR) is worth almost 10% less than one year ago. That may make some investors think twice about paying its current sky-high valuation of more than 20 times earnings, especially given talk of a €1 trillion monetary blitz by the European Central Bank, that will only drive the euro lower. With Q1 group turnover falling 6.3% to $11.4 billion on tough trading conditions, this Fool favourite has lost some of its charms.
Dollar Dividends Down
Similarly, the recovery in the BP (LSE: BP) dividend to 4.3% since the Gulf of Mexico disaster has also been undermined by sterling’s 13% rise against the dollar over the last year. The Royal Dutch Shell (LSE: RDSB) share price has been motoring this year, driving the yield down to 4.2%, against nearly 5% in January. Now sterling’s impressive rally against the greenback has driven it even lower in real terms.
It is the same story at another dollar dividend payer, global banking giant HSBC (LSE: HSBA). As if a drop of nearly 20% in its share price over the last 12 months isn’t bad enough, its dividend has also fallen victim to relative dollar decline. You still get a juicy 4.8%, however, well above the FTSE 100 average of 3.45%.
Finally, while the Rio Tinto (LSE: RIO) share price has rallied nearly 15% over the past 12 months, the real value of its 3.5% yield has also fallen to the punchy pound. Most analysts expect the pound to continue its fight back, but the silver lining of the UK recovery does come with a dark cloud for income seekers.
