UK companies’ recovery from Covid-19 is already underway after dividend payouts fell at slowest rate seen since the pandemic began, the latest Link Group UK Dividend Monitor shows.
Dividends from UK businesses payouts fell by 26.7 per cent (on an underlying basis - which exclude one-off special dividends) to £12.7bn in the opening quarter of 2021. This followed heavy falls in 2020 as companies cut or cancelled payouts to protect their balance sheets.
These cuts were the lowest seen in the market over the past year and totalled £5.8bn in Q1, almost half of which came from the oil sector.
Headline dividends - which include special dividends - rose 7.9 per cent in Q1 2021, which Link Group said was due to “the second-highest one-off specials on record” of £6.1bn.
Source: Link Group
Some companies had a positive start to the year, as half of UK businesses either increased, restarted or held its dividends steady. This was a major contrast to Q4 2020 where only one-third of companies could manage this.
Link Group said: “The first quarter of 2021 certainly continued to feel the Covid-19 dividend cuts, but there were clear signs of improvement too.
“Even though Q1 last year was a ‘normal’ quarter, and therefore presented an unforgiving comparison, four-tenths of companies either increased or restarted their dividends and another tenth held them steady. The other half made cuts, but this was the lowest proportion to do so in any of the four quarters since the pandemic began.”
Since the UK dividends collapsed in Q2 2020 – which saw a 48.2 per cent drop in payouts – each successive quarter has seen the rate of decline slowed, the Dividend Monitor found.
This is “a sign that recovery is on the way”, Link Group said.
The past 12 months have seen the Covid-19 pandemic take a significant toll on the UK income space.
“In total, Covid-19 cost investors £44.8bn in lost dividends from Q2 2020 to Q1 2021,” Link Group said.
“Over the past year there was a 41.6 per cent drop in payouts, with two-thirds of companies reducing or cancelling its dividends completely to deal with the financial impacts of the pandemic. This was “an unprecedented flood of cuts and cancellations.”
The impact was extraordinarily varied across the sectors, according to Link Group, with banks, miners and oil companies responsible for three-fifths of the cuts.
In contrast food retailers were the “stand-out winners” from a dividend perspective, increasing them by 22 per cent on an underlying basis over 12 months. But every sector did see cuts.
Source: Link Group
Overall, 27 per cent of companies were able to increase their dividends and 6 per cent kept them steady, “despite the worst recession in modern history,” Link Group said.
The majority of cuts came from mid- and small-cap companies, with the mid-250 names seeing a 60.3 per cent drop in payouts, totalling £6.7bn. Small-caps took the biggest hit, with 76 per cent of companies forced to reduce or cancel dividends.
But the top 100 companies – and typically the most popular stocks of UK income investors – were able to protect its dividends the best, due to being more financially resilient generally and some in more defensive sectors.
Some 54 per cent of the 100 biggest companies cut or reduced dividends. Payouts fell 39.1 per cent over the past 12 months, totalling £36.4bn.
But the signs of revival in 2021’s opening quarter led to Link Group to say “the outlook is brightening”.
Link Group’s best case scenario for 2021 is total underling payouts of £66.4bn - excluding one-off specials - an increase of 5.6 per cent year-on-year. However, this is down from the 8.1 per cent the group forecast in January. Headline payouts are expected to increase by a sixth, up to £74.9bn.
The worst case scenario has seen an upgrade due to greater visibility on payouts. Instead of dividends declining 0.6 per cent they’re now forecast to increase by at least 0.9 per cent on an underlying basis.
Ian Stokes, managing director of corporate markets EMEA at Link Group, said: “After the year-long pandemic winter for dividends, the buds of spring are about to burst into bloom. It’s hard to characterise the big drop in the first quarter as anything but bad news, but look closer and the green shoots are already sprouting.
“There are some big changes coming in the second quarter. During the pandemic, many companies that had been over-distributing permanently reset their dividends to more sustainable levels. Most of these now hope to grow their dividends from this lower base. For others the effect of the cuts is more transitory so they will bounce back quickly.
“Most importantly we will see the return of banking dividends though at relatively low levels. Investec blazed the trail in Q1, but Q2 will see all the banks start paying again. The commodity boom is leading to a surge in mining dividends too, but we expect growth to get stronger and broader over the next six months.
“Crucially we increasingly see limits to the downside this year, though we caution that 2025 still looks like the most realistic moment for dividends to match their 2019 high point.”