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Our review of Link Asset Services clients' 2017 dividend funding has largely demonstrated that, whilst overall payments grew, delivery mechanisms changed only slightly compared to 2016.

Dividend payments in cash terms increased 22% over 2016 which, by anyone’s standard, is a healthy uplift. There a few factors contributing to this change including productivity growth, increased competitiveness as a result of the weak pound during 2017, along with some healthy outlook sentiments despite the political uncertainties dominating much of the commentary throughout the year.

The decline of cheque usage for dividend settlement continued during 2017 compared to other payment methods, with a fall from over 44% in 2016 to 43% in 2017. This modest decrease echoes the overall decrease in cheque usage over the last 25 years (down 83%, according to the banking industry). Indeed, the advent of cheque imaging, self-service imaging via one’s own mobile device and alternative payment solutions whilst preserving cheques as a payment channel is unlikely to prevent further contraction of cheque issuance in the coming years, as digital options are gaining increasing traction. At Link Asset Services, our aim is to reduce cheque issuance to less than 25%* overall for all dividends paid during the 2020 calendar year and beyond.

Some issuers are already taking the leap into a paperless environment by removing cheques completely from the dividend cycle. We have seen Vodafone operating a chequeless dividend for a number of years. In 2017, Vodafone and Eurotunnel (who previously removed physical payments) were joined by FTSE100 constituents ITV plc and Aviva plc in removing cheques entirely from the payment process, and 2018 will see more companies embracing a chequeless future including Marks & Spencer plc.Electronic Funds Transfer (“EFT”) incorporating BACS, CREST and other electronic delivery channels will grow in popularity as cheques are removed from the dividend process. During 2017, almost 57% of dividend settlement was via some form of EFT. One of the major developments is the increase in the use of CREST as a delivery channel. The custodial community have formally requested that all issuers allow for dividend payments via CREST and have committed to use the service where possible. We are delighted that well over 80% of our clients now do so. Unfortunately, the take up has been more modest elsewhere, partly due to the fact that some registrars do not provide this service, despite it being an agreed market standard that provides significant benefit to our industry.

The table below demonstrates the change of usage across different forms of delivery by dividend value in 2016 versus 2017 and the significant rise of CREST as a chosen method by institutional investors.

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What is driving the demand for payments to be made in CREST? 

The increase is due to additional custodians electing for CREST dividend settlement, due to the following benefits that this payment delivery method provides: 

  • Immediate settlement of cash directly to CREST cash management accounts, thus providing an efficient outward flow to underlying investors, or for other investment requirements.
  • Lower costs. The cost of receipt and the electronic delivery of the dividend confirmations reduces back office costs to the Custodian and, arguably, to the end investor.

We have been providing CREST payment options since 2007 and are delighted that custodians are choosing this way to receive their dividends.

2018 and beyond 

In line with the trends from last and previous years, we expect that cheques will continue to decline in popularity and digital payment options will begin to dominate in our increasingly interconnected and mobile-dominated world. In the short to medium term it is likely that BACS will be the mainstay for dividend delivery to retail shareholders but in the longer term, we may see increasing use of online platforms like PayPal, Amazon, store cards or even crypto currencies as a preference. CREST payment options are very much in demand and we expect to see further growth in this area. A survey of the Share Society during 2017 supports the growth in digital channels for delivery of both returns and shareholder communications. We will continue to support these channels to further enhance the engagement between issuer and stakeholders. Link Asset Services was the first registrar to offer dividends via CREST and we are committed to giving investors choices that assist them in accessing secure, fast and lower cost dividend payment methods. Our industry must continue to move with what shareholders of all demographics demand (how many shareholders under the age of 30 want to receive a cheque?). Innovation and change is a necessity, and an area in which we strive to lead in our industry.

Jai Baker  -  Head of Industry
February 2018

*Clients who would like to discuss plans to reduce cheque usage in the future, should contact their Relationship Manager

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