UK Dividend Monitor Q3 2019

14 October 2019 / Link Group

Cracks begin to appear after years of growth for UK dividends

• UK dividends rose 6.9% on a headline basis in Q3 to £35.5bn, boosted by exceptionally large special dividends and exchange-rate gains
• Underlying dividends (i.e. excluding specials) fell 0.2% to £32.3bn, but were almost 3% lower on a constant-currency basis
• Mining and banks performed best, boosted by specials, but telecoms and retail suffered from big dividend cuts from household names
• UK plc will yield 4.4% over the next 12 months, close to historic highs
• Forecast for the full year upgraded to £110.3bn, an increase of 10.4%
• This upgrade is driven purely by low quality factors – higher specials and exchange-rate gains
• Underlying dividends set to rise 3.3% to £99.1bn; nine-tenths of this increase is down to exchange rates

The pace of dividend growth slowed in the third quarter following a double-digit increase over the first half of the year, according to the latest UK Dividend Monitor from Link Group. Even so, at 6.9% the headline growth rate appeared to be ahead of the long-run trend of 5% per annum. The total paid jumped by £2.3bn to £35.5bn, a Q3 record.

All of this growth was, however, provided by exceptionally high special dividends and a boost from the weakness of the pound. Underlying dividends (which exclude specials dividends) contracted 0.2%, yielding a Q3 total of £32.3bn. Even this total was inflated by £850m of exchange effects, which saw the sterling value of payouts denominated in US dollars and euros translated at more favourable rates.

On a constant-currency basis, underlying UK dividends fell by almost 3% in the third quarter, the worst quarterly performance for three years.

The underlying weakness was slightly worse among top 100 companies after factoring in the exchange-rate impact, thanks mainly to a deep cut made by Vodafone. Mid-caps saw their payouts drop 1.7%.

Banking dividends leapt by two-fifths in Q3, principally thanks to RBS which will have paid out a total of £3bn in 2019. Mining dividends jumped by almost a third, thanks to the big specials from Rio and BHP, but the next largest sector, oil, only saw a modest 2.8% increase driven by exchange rates. Media, leisure, and food retail all saw double-digit underlying increases, but most sectors delivered single-digit growth.

Telecoms were the worst hit, with payouts dropping 40%. Vodafone slashed its dividend by three fifths, saving itself £1.4bn with more to come in Q1 next year. The troubles on the high street continue to impact shareholders too. Dividends fell by a fifth, with cuts from household names Marks & Spencer, Superdry, and Dixons Carphone.

Over the next twelve months, UK shares will yield 4.4% (excluding any special dividends), not far off the record high equity yields reached in January. The top 100 will yield 4.5% and the mid-caps 3.3%. This is well ahead of the yield on other asset classes.

The Q3 result supports our forecast for underlying dividend growth slowing down owing to a combination of wider global economic weakness and UK-specific factors related to the dampening effect on the economy of the intensifying political crisis. Paradoxically however, we are upgrading our headline forecast for the year to account for the pound’s further weakness and the growing haul of special dividends. 2019 will see the second-highest special dividends on record, likely over £11bn. Link now expects £110.3bn for 2019, a headline increase of 10.4%. Underlying dividends (excluding specials) will reach £99.1bn, up 3.3% year-on-year, almost nine-tenths of which is down to exchange-rate gains. On a constant-currency basis, only 2016 has seen weaker performance for underlying dividends in recent years, thanks to the rebasing of payouts in the mining sector in a weak year for commodities.

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.

“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.”

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