Payouts by UK companies amounted to £99.8bn in 2018 following rising profits, slightly better-than-expected special dividends and a slump for sterling during the second half, according to the Link Asset Services Dividend Monitor.
Despite a more challenging year for the stock market in which the FTSE All Share index fell by 9.47 per cent, UK earnings held up in 2018.
Indeed, headline dividends rose by 5.1 per cent year-on-year while underlying dividends – excluding special, one-off payouts – grew by 8.7 per cent to £95.9bn.
UK dividends 2008-2018
Source: Link Asset Services
As such, the average yield on UK shares hit 4.8 per cent compared with an average yield of 3.5 per cent over the past 30 years.
Link Asset Services noted that dividends would have to fall by 25 per cent – far greater than during the global financial crisis – to reach the long-run average. Such a fall would be unlikely even if a recession or badly-handled Brexit were to occur.
Justin Cooper, chief executive of Link Market Services, said 2018 had been “a terrific year for dividends but a terrible one for share prices”, pushing yields to extraordinary heights.
He said: “A very high yield is often a sign of trouble ahead, as investors know that company earnings evaporate very quickly when the economy turns down.
“Dividends are less volatile than profits, as companies tend to smooth the cycle, but they can still be expected to fall if the economy shrinks.”
Cooper added: “Even so, a 4.8 per cent yield implies an overly pessimistic view. The current disconnect between the level of dividends being paid and share prices doesn’t obviously mean share prices must rebound any time soon.
“The yield may stay elevated for as long as uncertainty persists. But if the world does sink into a recession in the next couple of years, or Brexit goes badly, the drop in dividends is likely to be in the 10-15 per cent range, not the 25 per cent or so currently implied by the market.”
While traditionally a seasonal low point in the year for dividends, the final quarter of 2018 saw dividends rise by 15.6 per cent year-on-year to £17.3bn, £350m more than forecast.
According to the firm, the fourth quarter was flattered by a switch to quarterly payments by British American Tobacco while there was a particularly strong showing from the banking sector, which increased by 26 per cent during the quarter.
Source: Link Asset Services
Indeed, British American Tobacco was the biggest contributor to growth in UK dividends last year paying out an extra £900m when compared with last year, taking its 2018 total to £4.4bn.
In the banking sector, Royal Bank of Scotland paid its first dividend for 10 years while Standard Chartered paid its first dividend since 2015, as total banking dividends rose by 5.3 per cent in 2018.
Oil giant Royal Dutch Shell retained the top spot as the UK’s largest dividend payer, followed by HSBC, BP, British American Tobacco and GlaxoSmithKline. The top five firms accounted for 34 per cent of total dividends paid last year at £33.8bn.
The mining sector continued to grow its dividends – having cut them in 2016 – registering the largest year-on-year rise, up by 66 per cent to £11bn.
The biggest falls in payouts were recorded by domestic utilities (down by 44 per cent), airlines, leisure & travel (28 per cent) and motor manufacturing & parts (18 per cent).
Special dividends were also lower in 2018 after a particularly strong prior year, falling by two-fifths to £3.9bn.
While the dividend total for the top 100 companies rose by 4.6 per cent to £86bn paid out, there was greater growth further down the market cap spectrum.
Payouts from mid-caps increased by 6 per cent to £11.2bn although this was boosted by special dividends, rising by just 1.4 per cent on an underlying basis.
“Mid-cap underlying growth lagged the top 100 all year, including the fourth quarter, though the underperformance was rather concentrated in relatively few stocks,” Link Asset Services noted.
With 2018 proving a bumper year for dividends, the firm has moderated its forecast for this year anticipating headline growth of 4.2 per cent to a total of £104.1bn, albeit a new record.
This is based on special dividends falling further and reverting to the mean and exchange rate gains of £1.7bn based on the current exchange rate persisting throughout the year.
Link Asset Services’ Cooper said: “We still expect 2019 to break new dividend records, but our forecasts are not especially bullish – one or two companies face difficulties and the easy wins from the mining sector are behind us.”
However, with the fortunes of sterling tied to the ongoing and faltering Brexit negotiations it remains to be seen where sterling will head during the coming year and what impact it will have on payouts.
Performance of US dollar & euro vs sterling in 2018
Source: FE Analytics
Yet, even last year proved “complex”, according to Link Asset Services, with stronger sterling against the US dollar during the first half creating a large exchange rate penalty not fully reversed during the second half of the year. As such, over the full year the exchange-rate penalty – or the negative impact of currency movements – was £1.3bn for UK dividends.
“It is worth noting that moves in sterling can provide a meaningful contribution to reported dividend growth, given that approximately half of the market dividend comes from the top-10 payers whose operations are predominantly outside of the UK,” said Stephen Message, manager of the Legal & General UK Equity Income fund.
“Sterling has been seen as a barometer of progress in Brexit negotiations, and as such any strength this year would provide a headwind to dividend growth. Assuming there is no disorderly exit from the EU, these factors give plenty of headroom for dividends to grow further.”