The underlying dividends paid out by UK companies dropped during 2019’s third quarter to return their worst results in three years, according to a closely watched report. 
At first glance, the latest edition of the Link Group Dividend Monitor appears to contain positive news. On a headline basis, UK dividends rose 6.9 per cent on a headline basis in the third quarter to reach a record £35.5bn.
However, Link’s analysts added that all of this growth was down to “exceptionally high” special dividends and a boost from the weakness of the pound.
Over the quarter, £3.2bn was paid out in special dividends – four times more than in the same period last year. One-third of this came from two miners (BHP and Rio Tinto) while Royal Bank of Scotland, Cineworld and Taylor Wimpey were also major payers of specials.
When special dividends are stripped out, UK dividends were down 0.2 per cent in the third quarter. But even this is buoyed by weakness in the pound; run the data on a constant-currency basis and underlying dividends dropped by almost 3 per cent.
UK dividends’ Q3 specials and currency effects
Source: Link Group Dividend Monitor
Michael Kempe, chief operating officer of Link Market Services, said: “The predicted economic slowdown is beginning to show as UK plc payouts falter after years of solid growth despite the gloss of huge special dividends and eye-catching FX effects.
“As the world economy falters and the UK remains mired in its political crisis, we are witnessing a significant slowdown in UK plc’s dividend growth rate. This is inevitable given the increasingly lacklustre performance companies are putting in on earnings. Unlike 2016 it is not due to problems in just one sector; it is a more generalised slowdown.”
In terms of sectors, banks paid out the highest dividends during the quarter in question, distributing £6.2bn to shareholders (an increase of 38 per cent on a headline basis). This is largely down to Royal Bank of Scotland, which has paid out a total of £3bn this year in a mix of restored regular dividends and one-off specials.
HSBC held its payout steady (in dollar terms) for the sixth year and remains the third quarter’s biggest dividend payer. Meanwhile, Lloyds only made a “token increase” but Barclays raised its payout by a fifth.
Dividends in the mining sector were up by 29 per cent in headline terms, on the back of those specials from BHP and Rio Tinto; the sector paid out £6.1bn in the third quarter, coming in second after banks. Oil, gas & energy was in third place with £4.8bn in payouts, but this was an increase of less than 3 per cent on the previous year.
Q3 dividends – by sector
Source: Link Group Dividend Monitor
However, four sectors posted falling underlying dividends in the third quarter, after specials are excluded.
Telecoms were the worst hit, with payouts here falling 40 per cent. Vodafone cut its dividend by three-fifths, saving £1.4bn as it seeks to needs to reduce its debt burden and build the financial resources to invest in 5G networks.
“Its dividend had become unsustainable so resetting it was the right thing to do. Vodafone will drop out of the top-15 UK payers in 2020 for the first time since at least 2007,” the report said.
There was also a 19 per cent fall in the payouts from the general retail sector, as the UK high street continued to undergo a weak period. Household names such as Marks & Spencer, Superdry and Dixons Carphone cut their dividend in the quarter, while Next kept its payout flat.
In its outlook for 2019 as a whole, Link Group noted that the big trend this year has been for “enormous” special dividends and exchange-rate gains to mask “a fundamental slowdown” in the UK’s dividend growth rate.
“This is inevitable given sluggish earnings growth (with profits actually in decline among mid-caps),” the firm added. “The outright fall in underlying dividends in the third quarter was owing to a particularly large hit from Vodafone, but the prevailing trend is only for flat or low single-digit increases at present.”
Q3’s biggest dividend payers
Source: Link Group Dividend Monitor
But “paradoxically” given the downbeat backdrop, the group has upgraded its dividend forecast for the year.
It expects further weakness of the pound is likely to bolster the previous forecast of £2.1bn for exchange-rate gains this year by an additional £600m. Furthermore, it noted that special dividends “just keep surprising on the upside”; in July, Link predicted £8.7bn in specials for the full year but they are already on track to reach more than £11bn.
Link Group now expects headline UK dividends to hit £110.3bn in 2019, an increase of 10.4 per cent year-on-year and £2.9bn more than it forecast in July. Underlying dividends (excluding specials) will reach £99.1bn, up 3.3 per cent year-on-year.
However, almost all of this 3.3 per cent increase is down to sterling’s weakness. On a constant-currency basis, dividends will be less than 0.5 per cent higher in 2019, the weakest performance since 2016.
Kempe concluded: “2019 will almost certainly prove a temporary high-water mark for UK dividends. Volatile specials are likely to revert towards the mean and sterling is already partially pricing in a disorderly exit from the EU, so these more superficial factors will provide less cover for a more sluggish underlying performance in the year ahead.
“Having said that, the yield on equities is extremely attractive. Dividends would have to fall far more even than during the severe recession a decade ago to bring the yield back into line with historic averages. A decline of that size is extremely unlikely.”