UK Dividend Monitor Q2 2019

22 July 2019 / Link Group

• UK dividends rose 14.5 per cent on a headline basis to a record £37.8bn
• Exceptionally large special dividends and the very weak pound boosted the total
• Underlying growth of 5.0 per cent was weaker than expected
• Equity yields drop to 4.2 per cent on strong share price growth, but remain near historic highs
• Headline forecast upgraded significantly, owing to specials and sterling weakness
• But underlying dividend expectations are cut by £500m
• Headline dividends set for £107.4bn, up 7.6 per cent; underlying £98.7bn up 2.9 per cent, two thirds of which likely to come from exchange-rate gains  

UK dividends rose 14.5 per cent to an all-time high of £37.8bn in the second quarter, beating the previous record set two years ago by £4.4bn, according to the latest UK Dividend Monitor from Link Group. The quality of growth was, however, relatively poor: for the second quarter in a row, exceptionally large special dividends and a weak pound provided a temporary boost.

Underlying dividends (which exclude specials) rose 5.0 per cent 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 Link expected. Large-cap companies, which benefit disproportionately from the weaker pound, grew their payouts much faster than their mid- and small-cap counterparts.

Huge special dividends from Rio Tinto, Micro Focus International and RBS contributed most to the headline increase. Barclays also paid its largest post-crisis dividend, and along with RBS and Standard Chartered, helped make the banking sector one of the top performers. 

The top 100 saw payouts jump 18.5 per cent in headline terms, but the underlying increase was a more modest 5.7 per cent. More than half of this was down to exchange-rate effects. On an underlying basis, mid-cap dividend performance has lagged behind the top 100 for six consecutive quarters. In Q2, their payouts rose just 0.8 per cent. Headline mid-cap dividends dropped 5.7 per cent thanks to lower specials.

Rising share prices have meant lower yields on equities since the beginning of the year, but they are still extremely high by historic standards. This reflects the underperformance of UK shares and growing concerns over the UK and global economy. Over the next 12 months, equities will yield 4.2 per cent (excluding special dividends), with the top 100 producing 4.4 per cent and the mid 250 2.9 per cent. In January, shares in UK plc yielded 4.8 per cent.

Link’s headline forecast for 2019 received a hefty £2.8bn upgrade based on the fall in the pound and stronger special dividends. Specials will hit their second highest ever this year. Link now expects a headline £107.4bn in 2019, an increase of 7.6 per cent. Excluding volatile special dividends, underlying growth is set to be 2.9 per cent, almost two thirds of which is down to likely exchange-rate gains. Link has downgraded its forecast for underlying dividends by £500m to £98.7bn.

Michael Kempe, chief operating officer of Link Market Services said: 

"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.

“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. Q2 marks both the second upgrade this year to our headline forecast and the second downgrade to our underlying one. The true picture for dividends this year is therefore notably weaker than a first glance might suggest."
 

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