UK Dividend Monitor Q1 2022

 April 2022 / Link Group

Surging oil and mining payouts drive UK plc dividend upgrade for 2022

• UK dividends totalled £14.2bn in Q1 2022, down 24.9% on headline basis owing to one-off factors
• ​Underlying dividends of £13.3bn were up 12.2% after adjusting for one-off special dividends and BHP’s departure from the London Stock Exchange
• Oil companies drove growth in the first quarter, but all sectors saw higher payouts
• Mid-cap dividends rose much faster than top 100, but they are more vulnerable to economic slowdown
• Mining dividends will surge higher again in 2022, driven by soaring commodity prices
• Link Group’s forecast for UK plc dividends upgraded by £4.5bn to £92.2bn mainly due to higher mining payouts
• Underlying dividends set to reach £85.8bn, up 15.2%, excluding special dividends and the migration of BHP away from London

UK dividends had a strong start to 2022 although the headline figures don’t reflect the strength of the ongoing recovery from the pandemic. The latest UK Dividend Monitor from Link Group shows that headline UK payouts of £14.2bn fell 24.9% on a headline basis in the first quarter, but after taking lower one-off special dividends and the departure of mining giant BHP from the UK stock market into account, the adjusted underlying total jumped 12.2% to £13.3bn.

The biggest contribution to the Q1 increase came from the oil sector (+29%), where the astonishing rebound in oil prices has delivered a dramatic turnaround in fortunes. After oil dividends were cut sharply during the pandemic when crude prices crashed, there is a lot of headroom for growth now that the oil majors are enjoying a big increase in their cash flow. Mining dividends were minimal in Q1, but they will be very large in Q2.

All sectors increased underlying payouts in the first quarter. Highlights included AstraZeneca’s first increase for almost a decade, the return of BT’s dividend after a two-year hiatus, and a post-Covid-19 rebound from the property sector. Retailers are also showing signs of revival with large special dividends from Next and B&M European Value, while Royal Mail’s special dividend reflected strong trading delivering internet purchases through the pandemic. Dividends remain scarce from the hard-hit travel and leisure industry.

Mid-cap dividends rose faster than the top 100, up 30.5% on an underlying basis. They had fallen much further during the pandemic so have more room for recovery. Even so, they remained a sixth below their pre-pandemic Q1 total.

The outlook for 2022 has improved since Link Group’s January edition of the Dividend Monitor. Mining dividends were minimal in Q1, but they will be very large in Q2. Commodity and oil prices have soared, bolstering the prospects for two of the UK’s biggest dividend-paying sectors, while banking payouts continue their post-Covid-19 recovery at a slightly faster pace than Link Group expected. Most sectors will show growth this year.

The ongoing mining boom has contributed to around 80% of the £4.5bn upgrade in Link Group’s 2022 forecast. Link Group now expects headline dividends to reach £92.2bn this year, a fall of 0.8% year-on-year reflecting lower one-off specials and BHP’s migration from London. Underlying payouts of £85.8bn will be 15.2% higher than 2021, after adjusting for the BHP departure. Link Group expects mid-cap companies to suffer a greater impact from the constraints on consumer demand caused by cost-of-living increases and from squeezed margins, but the biggest companies should be relatively insulated or are even benefitting.

For the year ahead, Link Group expects UK plc to yield 3.7%. The expected top 100 yield has risen to 3.8% reflecting the increased forecast for dividends (up from 3.7%). Mid-caps have seen their yield rise to 2.4%, up from 2.1% though this is more a consequence of lower share prices.

Ian Stokes, Managing Director, Corporate Markets UK and Europe said: “2022 started as strongly as we expected, and we anticipate the rest of the year to surpass our expectations. The war in Ukraine is partly responsible as it has pushed oil and metals prices ever higher, driving strong profits in related sectors. The mining sector cannot sustain its breakneck pace of dividend increases nor the size of its special dividends indefinitely, but the boom continues for now. Meanwhile the oil sector is back – both in the black and in the headlines – though its distributions would have to double to regain pre-pandemic highs. In inflationary times, investors have often looked to commodities like these as a hedge against rising price levels elsewhere in the economy.

“There are risks to our forecast view of where dividends are heading, related to the constraint on consumer demand caused by energy price hikes here and around the world, and related to cost pressures that will weigh on margins for a number of sectors. Mid-cap companies are more likely to show any strain than the top 100."

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