UK Dividend Monitor Q3 2018

September 2018 / Link Group

Justin Cooper, chief executive of Link Market Services -
“Banking dividends are moving up a gear, just as the roaring engine of mining dividends is getting set to slip back to neutral. Commodity prices have recovered some of their poise after trade-war-induced wobbles, but the easy profit gains from higher prices have passed for now, and earnings are beginning to disappoint analysts. The banks, by contrast, have for the most part finally slipped the noose of regulatory fines, and shucked off the burden of lengthy restructurings. With interest margins now improving, they have headroom to pay their shareholders more in dividends.

“2018 dividends may not quite breach the £100bn milestone, but it's going to be a close-run thing. Investors are getting ready to celebrate another record-breaking year for dividends.”

• Total dividends climbed by 4.1% to £32.3bn at headline level, a third-quarter record
• Underlying dividends (i.e. excluding specials) rose 6.9% to £31.6bn, an all-time quarterly record
• Banks and mining companies helped boost the total; retail stood out as weak spot
• Top 100 firms outperform mid-caps owing to strong showing from a small number of large companies
• Falling share prices and rising dividends meant equity yields jumped to 4.1%
• Link upgrades its 2018 forecast for headline dividends by £1.1bn to a record £99.5bn, an increase of 4.8%
• Increased forecast reflects returning strength of banking sector, weakness in sterling, and stronger than expected Q3 payouts
• Underlying dividends (i.e. excluding specials) are now set to reach £95.8bn this year, also a record, and an increase of 8.6%

UK dividends rose 4.1% to £32.3bn in Q3, breaking a third-quarter record, according to the latest UK Dividend Monitor from Link Asset Services. Underlying payouts, which exclude special dividends, reached £31.6bn, a rise of 6.9% year-on-year.

The increase was faster than Link expected thanks to a particularly strong showing by financials and mining companies. There was also a small boost from a weakening pound, which meant dividends declared in dollars and euros were translated at more favourable exchange rates. There was also good news for BP’s shareholders, who enjoyed the first increase in their dividend, in dollar terms at least, in four years.

Mining companies contributed most to growth, as the last of the big commodities groups, Glencore, restored its payout to full strength. In the banking sector, sharply higher profits meant Barclays raised its interim payout by 150%, an increase of £257m year-on-year. Its final dividend is likely to jump too when it is declared next year. The bank had cut its payout to the bone as it absorbed the impact of hefty fines from the US regulator. Lloyds continued its winning streak, raising its payout by a tenth. Smaller banks also did well. HSBC, once again, made no increase, however. Payouts from general financials and insurance were strong across the board – only two companies out of thirty saw lower payouts.

Retail stood out as a weak spot. The much-publicised difficulties on the high street have squeezed profits hard, which in turn is putting pressure on dividends. Most retailers held their dividends flat, among them M&S and Dixons Carphone, or made very made modest increases, like Sainsbury’s. The overall total fell, however, thanks in particular to a big cut at Next, which did not pay its perennial special this year. Debenhams’ meagre dividend was halved.

Top 100 dividends outperformed mid-caps on an underlying basis, rising 6.7% thanks to the very strong performance of a handful of stocks. Mid-cap payouts lagged behind, rising just 2.7%, as one or two larger mid-caps cut their dividends steeply.

The yield on UK shares over the next twelve months rose to 4.1%, up from 3.9% thanks to falling share prices and rising dividends.

Link has upgraded its forecast for 2018 by £1.1bn. Renewed weakness in the pound accounted for a quarter of this upgrade, and the news that RBS is returning to dividend payouts for the first time in 10 years, accounted for another fifth. The rest reflects the stronger-than-expected Q3, as well as new announcements of payments to be made in the fourth quarter. Link now expects headline dividends to total a comfortable record of £99.5bn for 2018, an increase of 4.8%. Underlying dividends (which exclude specials) are set to reach £95.8bn, also a record, and an increase of 8.6%.

With grateful thanks to Exchange Data International for providing the raw data

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