UK dividends hit a three-year low in the third quarter of the year, but a weak pound and flurry of special dividends have masked the weakness is company pay outs.
UK dividend growth started to slow in the third quarter due to a softening world economy and the UK’s ongoing political crisis, according to the latest Link Group research.
Including special dividends and a boost from the weaker pound, the overall value of dividends hit a new third quarter record of £35 billion. But ignoring special dividends, the value of the payouts fall by 0.2% to £32.3 billion. And then stripping out the boost from the weaker pound (on a “constant currency” basis), the quarter's dividends were the lowest in three years.
Two sectors - banking and mining - drove the growth in payouts, with Rio Tinto and BHP both paying specials in the last three months. Dividends from the banking sector were up 40%, but payouts from the telecoms sector were down by the same amount, hit by Vodafone’s decision to cut.
The fall in the pound since the Brexit vote in 2016 has helped artificially boost the earnings of those companies, particularly in the FTSE 100, that get paid in dollars. “2019 will almost certainly prove a temporary high-water mark for UK dividends,” says Michael Kempe, chief operating officer of Link Market Services.
In the short-term, that's been good for investors: the FTSE 100 is set to yield 4.5% over the coming 12 months and mid-caps 3.3%. But Kempe thinks the weak pound may be due a rebound, particularly as a no-deal Brexit is widely expected and, therefore, largely already priced in to its value. He also believes that the pace of special dividends may not last either.
Indeed, some companies are already struggling to maintain their pay outs. Link says four sectors saw dividends decline in the quarter, with telecoms the worst affected. General Retail, IT and Industrial Goods and Support were the other industries which saw pay outs decline.
The top-payers, meanwhile, continue to prop up the rest of the FTSE. The top-five payers in the quarter - Vodafone, Shell, HSBC, BP and National Grid - accounted for 37% of total payouts in the period. The top 10, accounted for 68% of dividends.
Boost from Banks
According to Link, Royal Bank of Scotland (RBS) – which didn’t pay a dividend for 10 years after the financial crisis – has paid out £3 billion to shareholders so far this year, helped by a 12p a share special in September. Special dividends have been favoured by banks because they protect ordinary dividends in terms of financial stress.
Merian banking analyst Rob James thinks this is a prudent strategy given the banks’ recent history – shareholders will mind the loss of a special dividend a lot less than a cut to the standard payout. With specials, RBS yields around 10%, but without, the yield is a more modes 3%.
Link now expects payouts from UK companies to hit £110.3bn for 2019, a headline increase of 10.4% on the previous year. On a yield basis, UK equities remain attractive, Link’s Kempe says, with the FTSE 100 forecast to yield 4.5% over the next year and the FTSE 250 3.3%. This is well ahead of the yield available on other assets classes, he notes. The 10-year UK gilt currently has a yield of 0.61% and the five-year has a yield of 0.41%.
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