Dividends in the spotlight as this FTSE 100 pair pay less

Some of the country’s biggest companies also pay some of the most generous dividends, but times are changing for these two FTSE 100 giants.

Income investors were given a jolt today when top-paying Rio Tinto (LSE:RIO) cut its dividend by more than expected and GSK (LSE:GSK) embarked on a new policy after its Haleon (LSE:HLN) demerger.

Rio’s shares fell sharply even though it set aside $4.3 billion (£3.6 billion) for shareholders in what still represented the company’s second-highest interim dividend on record.

The award of $2.67 a share, which amounted to 50% of underlying earnings, was 29% lower than the previous year’s bumper haul as market conditions have become much tougher. It was also 21% below consensus estimates. 

The City had expected a payout ratio of at least 60% for a dividend of about $3.39 a share, which would have been much closer to 2021’s interim award of $3.76 a share.

Rio’s total dividend for last year eventually hit an all-time high of $10.40 a share, which included a $2.47 special dividend and represented a 79% payout ratio after the mining giant benefited from soaring commodity prices in the global economy’s pandemic recovery.

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This created a market-leading dividend yield of more than 11% at a time when global interest rates still languished close to record lows. However, because Rio shares are down 23% since early June and near their lowest prices of 2022 so far, the dividend yield is still much higher than most.

Rio’s stated dividend policy is for returns to shareholders to be in a range of 40% to 60% of underlying earnings in aggregate through the economic cycle. But this ratio has averaged 74% over the past six years due to special dividends in periods of strong earnings and cash generation, with the peak being in 2017 at 83%.

At the half-year stage, the 50% ratio is firmly in the middle of that policy range as the cooling of iron ore and other commodity prices and higher operating costs caused underlying earnings per share to fall 29% to $5.32 in today’s results.

It’s a performance set to be mirrored by other large-cap miners in the coming weeks, including at Anglo American (LSE:AAL) after weaker production of copper and iron ore for the first half of 2022.

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In contrast to high-yielding Rio, the appeal of GSK’s dividend for many of its 70,000 small shareholders has been in its consistency after the pharmaceuticals giant made an annual award of 80p a share for many years.

This included a second-quarter dividend of 19p for payment in early October, but that’s now changed due to the impact of this month’s demerger of healthcare business Haleon.

Alongside today’s better-than-expected results, GSK confirmed a quarterly dividend of 16.25p a share and its intention to pay 61.25p across the financial year. These figures are the equivalent of 13p and 49p prior to the consolidation of shares, when GSK shareholders received four shares for every five held in order to account for the Haleon demerger.

New-look GSK, which has set out a progressive dividend policy guided by a 40% to 60% payout ratio, has already said it expects to deliver 56.5p a share in 2023.

Haleon is due to declare its first dividend with interim results on 19 September, when it is expected to target the lower end of a 30% to 50% payout ratio.

Bank of America said recently that it expected a dividend of 2.75p for 2022, rising to 6.92p the following year. The newly listed company’s stuck by medium-term guidance in a trading update today, although it expects revenues for this year to be higher than first thought at between 6% and 8%