The post-crisis recovery in UK dividends has continued into the first quarter of 2021, according to Link’s latest Dividend Monitor, with half of listed companies increasing, restarting or holding their payments steady in the last three months.
Excluding special dividends, payouts fell 26.7% to £12.7 billion, with around half of the cuts coming from the oil sector. But including special dividends, income paid out to shareholders was up nearly 8% on the first quarter of 2020, before the full impact of the dividend crisis hit home. Looking ahead to the second quarter, Link says the restarting of bank dividends will be a pivotal point in the year for UK income investors.
The UK Dividend Recovery
While the overall numbers show a chunky decline in dividends year on year, there have been plenty of bright spots for income investors – as well as few disappointments. On the plus side, Tesco’s (TSCO) one-off payment of around £5 billion helped push special dividends to £6.1 billion, their second best quarter on record, Link says. Tesco also helped food retailers increase their combined payouts by 22% year on year.
Other contributors to the specials bonanza include miner BHP (BHP), which has benefited from the surge in demand for recovery commodities like copper and iron core. Speaking of booms, Britain’s largest housebuilder Persimmon (PSN) interim payment of nearly £400 million was the biggest single contributor to Q1 ordinary dividends, Link says.
On the downside, some high-profile names cut dividends in the quarter including BT (BT.), Primark owner Associated British Foods (ABF) and budget airline easyJet (EZJ), the latter two covered recently as our stocks of the week.
All Eyes on the Banks
Link is more optimistic about the second quarter of 2021, especially as UK banks start to restore payouts. Ian Stokes, Link’s managing director of corporate markets EMEA, says: “After the year-long pandemic winter for dividends, the buds of spring are about to burst into bloom. European regulators lent on financial companies during the crisis to withhold their payouts to focus on their most needy customers. But now they have the green light to restart payouts, UK investors will be eagerly awaiting dividend updates as banks start to report results this week.
Away from banks, Link reports positive signs from mining companies, insurers and media companies, but expects the dividend recovery to start widening out across sectors throughout this year. “The commodity boom is leading to a surge in mining dividends, but we expect growth to get stronger and broader over the next six months,” Stokes says.Still, despite the rebound in many companies’ dividends, those in the worst affected sectors like energy used the pandemic to reset high dividends to more realistic levels, he adds.
Morningstar index expert Dan Lefkovitz has looked at whether investors could have avoided the 2020 dividend crash by focusing on certain sectors – and avoiding those like oil whose payouts were already looking stretched in early 2020.
Best and Worst Cases
Link also produces annual forecasts based on worst and best-case scenarios, which inevitably change throughout the year progresses – and as companies give greater clarity on earnings and dividends. On a best-case scenario UK payouts are expected to rise by 5.6% on 2020 to £66.4 billion, excluding special dividends. Even under a worst-case scenario, this will still involve a rise of just under 1%.
Given that Tesco’s £5 billion one-off has already been “banked” for the first quarter, the outlook for dividends including specials is much brighter – under a best-case scenario, this year will see a 17% rise overall to nearly £75 billion. Even under a worst-case scenario, this total will still reach £71 billion. Despite the brighter outlook, Link sticks with its forecast that UK dividends won’t reach pre-pandemic levels of £100 billion plus again until 2025.
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