Interactive Investor

Blow for UK equity income funds as miners cut dividends

27th February 2023 10:25

by Kyle Caldwell from interactive investor

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The dividend cuts are a reminder that mining companies are not reliable income payers. 

Mining vehicles 600

Dividend cuts last week by mining giants Rio Tinto (LSE:RIO), BHP Group (LSE:BHP) and Anglo American (LSE:AAL) is bad news for investors in UK equity income funds.

Such funds typically have between 5% to 10% in mining stocks, which have been generous payers of dividends over the past couple of years due to booming profits. According to Link Group, a financial data firm, mining dividends accounted for £1 in every £6 distributed by UK companies in 2022, double their average over the last decade.

However, the sector is not historically a reliable dividend payer. Mining company dividends fluctuate depending on the performance of the iron ore price. In addition, some firms have strict dividend payout ratios. As a result of this, if they make less money, then the dividends are cut.

Falling iron ore prices led BHP to cut its interim dividend from $1.50 per share to $0.90, while Rio Tinto reduced its dividend from $4.17 to $2.25. Rio’s policy is to pay out 60% of adjusted earnings. Anglo American, meanwhile, reduced payouts from $1.18 to $0.74. This is in line with its 40% payout policy.  

Other mining companies could follow suit, which would make the sector less attractive from an income perspective.

UK equity income funds will be negatively impacted from mining dividend cuts. Data from Morningstar shows the passively managed Vanguard FTSE UK Equity Income fund held 15.8% in miners at the end of January. Rio Tinto is the top holding, accounting for 5.8%.

Last year, BHP changed its corporate structure to have a primary listing on the Australian Securities Exchange. However, as fund managers can hold up to 20% in overseas shares it can still be held by UK equity income funds.

Overall, dividends from British companies are forecast to fall this year, as special dividends dry up due to slow economic growth.

Link Group forecasts a 2.8% drop in dividends in 2023 compared with 2022. This would mean £91.7 billion returned to shareholders compared with £94.3 billion last year.

The drop is due to a sharp decline in special dividends as economic conditions worsen. However, underlying dividends – which just include standard payments that companies make to shareholders – are forecast to increase 1.7% this year.

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