The latest dividend report from Link underlines the strong recovery in UK dividends from 2020’s crisis, with income from UK plc in the third quarter nearly 90% higher than a year ago. Special dividends accounted for the bulk of this increase, but without them the level of income paid out to UK shareholders was more than 50% higher. With the end of the year approaching, Link has upgraded its 2021 forecast but dividends paid out by UK companies this year are expected to fall short of pre-pandemic levels after a bruising reset last year.
In its overview of UK income, Link says dividends in the last quarter reached nearly £35 billion, or £27.7 billion excluding special dividends. The biggest contributors in the last three months were the mining, oil and banking sectors. Booming commodity prices this year have helped resources companies generate billions in spare cash for shareholders, while UK banks have been able to restart payouts after a regulatory freeze in 2020. Mining companies were central to this strong recovery, accounting for nearly £1 in every £4 paid out, according to Link. In Q3, mining companies paid out £23 billion, more than the next five sectors combined. One of these companies paying an outsized special dividend was BHP (BHP). The company, which is planning to shift its primary listing from London to Australia, is expected to pay out $15 billion to shareholders in this financial year. IN Q3 this year, the top dividend payers by overall payout were Rio Tinto, BHP and Anglo American, but this time last year the top three was Rio, British American Tobacco and National Grid – looking further back, Shell, Vodafone and HSBC were in the top slots five years ago.
Can the mining bonanza continue for shareholders? While oil prices are at multi-year highs and are eyeing the $100 a barrel level, some commodities have fallen back as investors recalibrate their expectations for global growth, particularly that of China. Iron ore prices, for example, spiked in the summer but have fallen back sharply. Ian Stokes, managing director of corporate markets UK and Europe at Link Group, says the commodity is likely to mean lower payouts from mining companies next year. Overall, the extractive industries will make up almost a third of UK dividends this year. This leaves “investors in UK equities uncomfortably reliant on two volatile, highly cyclical sectors for income”, Link says. “This industry is highly cyclical … and the companies are wisely no longer operating progressive dividend policies, meaning that payouts will rise and fall with the commodity cycle.”
Special dividends are expected to continue into the fourth quarter, helping Link to upgrade their full-year forecasts. “The boom in special dividends reflects how some companies are making catch-up payments, some are capitalising on very strong demand, and others are seizing the moment to sell assets at a time of high prices and numerous cash-rich potential buyers,” says Stokes.
We’re now in the fourth quarter so full-year forecasts are able to be made with confidence than at the beginning of the year. Headline dividends, including specials, are expected to creep over the £93 billion level, an increase of around 45% on 2020, when the overall income level fell to £62 billion – the lowest since 2011. Excluding specials, Link forecasts dividends to reach £77 billion, a more modest rise of 22%. Looking at both the quarter on quarter and annual bar charts, it’s clear that UK dividends still have a way to go before getting back to the 2019 peak, which now looks like the high water mark – and a golden era for UK income investors.
Still, there are reasons to be optimistic, though – UK dividends (excluding specials) are expected to regain 2019 levels by 2024, now a year earlier than Link forecast previously. The unevenness of the income recovery is still a key feature of this market – at this stage of the year, only five sectors paid out more than they did in the first nine months of 2019: e mining, food retail, basic consumer goods, general financials and healthcare. “Mixed bag” sectors include general retail, housebuilding, consumer goods and services. Airlines, travel and leisure sectors remain weak spots, Link says, with most companies paying nothing at all.
2022 is more of a mystery than the fourth quarter, but other sectors are expected to pick up some of the slack from waning mining payouts. “With banks returning to strength and other sectors continuing to recover we still expect growth in 2022, but dividends will face headwinds rather than enjoy 2021’s strong, but blustery following breeze,” Link’s Stokes says. Special dividends are expected to drop back from recent highs, but ordinary dividends are forecast to grow again – even factoring in the loss of nearly £5 billion income from BHP and Morrisons, which has recently been taken private.
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