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UK dividends stage dramatic bounce-back in Q2, though the road to full recovery is still a long one
- Q2 dividends jumped 51.2% to £25.7bn on a headline basis, ahead of our expectations
- On an underlying basis (i.e. excluding special dividends), payouts rose 43.8% to £24.3bn, recovering to one sixth below the pre-pandemic Q2 2019
- Companies restarting dividends were the main driving factor – accounting for nine tenths of the increase year-on-year
- The three biggest dividend-paying sectors are mining, banking and oil - of the £8.7bn recovery in UK plc Q2 dividends year-on-year, the mining and banking made up over two thirds of the increase, but the oil sector acted as a brake
- Link Group upgrades its 2021 headline forecast by £2.5bn to new total £79.5bn, up 24.4% year-on-year
- Underlying dividends upgraded 3.9 percentage points to £71.2bn, an increase of 13.4% year-on-year
UK dividends jumped a phenomenal 51.2% to £25.7bn, according to the latest UK Dividend Monitor from Link Group, beating its expectations. On an underlying basis (which excludes special dividends), second-quarter payouts were 43.8% higher at £24.3bn, one sixth lower than their pre-crisis average, but nevertheless an impressive recovery.
The second quarter compares to the low point of the pandemic in Q2 2020, providing an exceptionally favourable base. (In Q2 2020, three quarters of companies cancelled or cut dividends.) A mix of dividend restorations, catch-up one-offs and timing changes, alongside regular annual increases for companies that have traded well through the crisis all worked in the second quarter’s favour and delivered a stellar bounce-back. In Q2 2021, around nine tenths of the increase came from companies that had cancelled dividends in Q2 2020.
The upside tailwinds will get less favourable from here, reflecting the unwinding of Q2’s positive timing effects and an increasingly more challenging year-on-year comparisons that reflect the progressive slowdown in dividend declines in 2020. On the positive side, Link Group expects banking dividends to rebound now that regulatory limits have been scrapped, but not immediately to their pre-pandemic levels as share buybacks will also feature.
Link Group now expects headline dividend growth of 24.4% to a new total of £79.5bn this year (£2.5bn more than our April forecast). Underlying dividends, which exclude specials, are set to rise by 13.4% to £71.2bn, 3.9 percentage points or £2.7bn more than our April forecast.
The three biggest dividend-paying sectors are mining, banking and oil. Of the £8.7bn recovery in UK plc Q2 dividends year-on-year, the first two of these accounted for over two thirds of the increase, but the oil sector acted as a brake.
Mining dividends made up a quarter of the Q2 total at £6.3bn, thanks in particular to Rio Tinto. Banks remained under PRA constraints the second quarter, but they nevertheless distributed £3.4bn between them, with HSBC easily the largest contributor. The oil sector, which accounted for almost £1 in every £5 distributed by London’s listed companies, saw payouts decline in Q2 year-on-year, simply because the anniversary of all the reductions in the sector had not yet passed. From Q3 we will see year-on-year comparisons reflect the new base and oil dividends are set to settle at around £1 in £10 of UK dividends in future.
A crucial part of the strength in Q2 reflects timing factors. For example, BAE Systems was among a significant number of companies which returned to their usual schedule of paying a second-quarter dividend, having paid late in 2020. Despite the artificial boost provided by these purely technical factors, Q2 still left investors pocketing around £1.5bn more in dividends than Link Group had pencilled in. The biggest contribution to the upside surprise came from industrials, financials and basic materials, accounting for almost a third each.
The bounce-back was fastest for mid-caps, reflecting the greater decline they suffered in 2020. The prospective 12-month yield on UK plc shares rose to 3.2% compared to its April 2021 level.
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Ian Stokes, Managing Director, Corporate Markets UK and Europe said:
"We have regularly cautioned over the last year that dividend patterns will be very noisy as we move through the recovery phase. This will make for choppy waters in the months ahead, but it does not mean we are pessimistic. Far from it. As normal life returns to Britain’s streets, so it is returning to business too. All the indicators of economic growth look very encouraging, and companies have come out of the crisis in most cases with their balance sheets looking strong. Resurgent profits and healthy bank balances mean more dividends for shareholders. These wider trends also help explain why the regulator has lifted the embargo on dividends from capital-rich banks.
“Before the pandemic, dividends reached £100.3bn, even before one-off special payouts were added, so the recovery has a way to run.”