UK Dividend Monitor Q3 2021

 October 2021 / Link Group

UK dividends roar back to life in Q3 spurred on by unprecedented mining boom

• Dividends soared in Q3, recovering 89.2% to £34.9bn on a headline basis, largely thanks to the mining boom and very large one-off specials
• ​Underlying dividends jumped 52.6% to £27.7bn
• Almost all sectors saw an increase, but only five have paid out more than in 2019
• ​Q3 strength drives big upgrade in 2021 forecast – now set to rise 44.8% headline; 22.4% underlying
• ​2022 will see further growth, boosted by the banks, but falling commodity prices are likely to mean lower mining payouts

The Overview

UK dividends soared to £34.9bn in the third quarter, up by 89.2% year-on-year on a headline basis, according to the latest UK Dividend Monitor from Link Group. Large one-off special dividends were partly responsible for the unexpectedly large increase, but even the underlying total (which excludes specials) jumped sharply, up 52.6% to £27.7bn. Q3 2021 is set against a pandemic-struck Q3 2020, during which payouts halved. The large rebound in the latest quarter is still not enough to restore dividends to full strength, taking the headline total only a little higher than the level last seen in 2018. Most sectors have paid less year-to-date than they did in 2019.

The Outlook

The extremely strong result for Q3 means an upgrade to Link Group’s 2021 forecast, mainly at the headline level. Q4 is also likely to bring more one-off specials, but Link is adding modestly to its underlying forecast for the final quarter too. For the full year, Link Group now expects headline dividends of £93.2bn, an increase of 44.8% year-on-year. Underlying dividends are set to rise 22.4% to £77.4bn. Of the nine-percentage-point underlying-growth upgrade, more than seven tenths is due to the mining boom.

The Detail

This unprecedented boom in mining dividends, which quadrupled year-on-year to £12.8bn, meant the sector’s Q3 payouts outgunned the next five biggest sectors combined. For the full year, miners will be responsible for nearly £1 in every £4 distributed by UK-listed companies. A very sharp rebound in oil prices is also enabling oil payouts to recover more quickly than expected. Banking dividends made a very large contribution to growth in Q3 too. They were banned this time last year, so their restoration is making a big splash, even though payouts remain well below pre-pandemic levels. There was, however, strength across almost all sectors, but those in the consumer discretionary group saw a wide divergence between companies restoring dividends and those still unable to pay – for example, most travel and hospitality companies paid nothing, while some general retailers and industrials bounced back and others stayed on the side-lines.

Soaring special dividends added a £7.2bn boost to the headline total, much more in three months than in a typical full year. Mining groups accounted for three fifths of the total value of specials paid.

Link Group expects UK plc to yield 3.5% over the next twelve months.

Ian Stokes, Managing Director of Corporate Markets EMEA, part of Link Group said: “Forecasting the rebound for UK payouts has been rather more difficult than working out where the cuts would fall last year. The recovery is certainly uneven and it has caused a growing concentration on extractive industry payouts – not a comfortable long-term position for income investors.

“The good news is that we have consistently seen companies deliver more in dividends than we thought likely at the beginning of the year in the depths of the UK’s longest, strictest lockdown. Now almost the whole economy here and in most developed countries is open for business, even if supply chains are in a mess. Moreover, companies were progressively less impacted by each lockdown and many of them took action to bolster their balance sheets during 2020, either with new borrowing, new equity issuance, or cost-cutting (including dividends!). Dividend firepower is now much stronger as a result.

“The boom in special dividends reflects how some companies are making catch-up payments, some are capitalising on very strong demand, and others are seizing the moment to sell assets at a time of high prices and numerous cash-rich potential buyers.

“The mining sector raises an amber warning, however. Commodity prices have come down sharply recently which makes it likely their dividends will be lower next year. With banks returning to strength and other sectors continuing to recover we still expect growth in 2022, but dividends will face headwinds rather than enjoy 2021’s strong, but blustery following breeze."

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