UK companies paid out £37.8bn in dividends during the second quarter of the year, a 14.5 per cent year-on-year rise, according to data from Link Group, although the quality of the payouts remains a concern.
Link Group’s UK Dividend Monitor found the level of payouts beat the previous record set two years ago by £4.4bn, with the headline amount boosted by what the group labelled “exceptionally large” special dividends and very weak sterling.
With more than two-fifths of the second-quarter dividends paid out in euros or US dollars and sterling slumping over growing concerns of a ‘no deal’ Brexit, this meant £820m was added to headline dividends.
Underlying dividends – which exclude specials – rose by just 5 per cent year-on-year to £32.4bn.
“Though the total paid was a record, exchange rate gains made up almost half the increase and growth was otherwise a touch slower than we expected,” the group noted.
“For the rest of the year, the current level of the pound implies further gains to come, though this picture could easily change for the better or worse, depending on how the UK’s political dilemmas unfold.”
Source: Link Group
Nonetheless, the group has upgraded its dividend expectations for the year to £107.4bn, a 7.6 per cent rise on 2018, which was itself a record year when £99.8bn was paid out.
Special dividends from Rio Tinto, Micro Focus International and Royal Bank of Scotland contributed to the 14.5 per cent increase in headline payouts.
The one-off payments were 147 per cent higher year-on-year at £5.4bn, with two-fifths of the total coming from Rio Tinto alone.
However, Link said that after a strong first half for special dividends, payouts should revert to the longer-term average.
On a sector basis, IT saw the biggest year-on-year headline change with dividends rising by 510 per cent to £1.8bn, while industrial chemicals raised dividends 167 per cent to £250.9m
The biggest dividends came from the banks where £7.5bn was paid out, miners (£6.4bn) and oil, gas & energy (£4.9bn).
As mentioned, the slowdown in the UK economy has hit payouts from the mid-cap sector hardest, with FTSE 250 companies raising dividends by just 0.8 per cent on an underlying basis (specials not included).
Source: Link Group
“The sharp slowdown in the UK economy is most apparent among mid-caps, whose profits have fallen for four quarters in a row,” said the group. “This is affecting their ability to sustain dividend growth.”
Meanwhile, the more internationally focused FTSE 100 saw payouts soar by 18.5 per cent in headline terms and by 5.7 per cent on an underlying basis.
As such, Link is forecasting a yield of 4.2 per cent (excluding specials) over the next 12 months, down from 4.8 per cent.
“Equities are holding fast to the top spot, well ahead of the other main asset classes,” it concluded. “Concerns over growth have pushed the UK 10-year gilt yield down to 0.69 per cent, below overnight rates, and only a little above the record low reached three years ago following the EU referendum.
“Cash savings and residential property return an unchanged 1.5 per cent and 2.9 per cent respectively.”
Yet the group remains cautious about the UK corporate environment as earnings growth languishes near the bottom of global league tables.
As recent data from the Office for National Statistics (ONS) revealed, UK national profit share fell for a second consecutive year in 2018, although profit share fell for all countries that it benchmarked against.
For the UK, Germany and France, the decline coincided with a period of slower growth in 2018, the ONS noted, when their respective gross domestic product grew at a lower rate than that experienced by the EU as a whole.
National profit share for selected countries 1997-2018
Source: ONS
“Analysts are currently forecasting an improvement in profit growth in 2020, though this will still be below comparable countries, and is contingent on an orderly Brexit,” it said.
“As the world economy slows and a looming Brexit exacerbates the underperformance of the UK economy, corporate profits are under pressure and that is limiting the scope for dividend growth.”
It added: “Investors are being dazzled by eye-catching specials and exchange-rate trimmings, but the UK’s dividend clothes are starting to look a bit threadbare underneath.”