Dividends on way to recovery, despite many laggards

Link Group warns that there’s wide divergence between firms restoring dividends and those that are not.

UK dividend payments rose by almost £40 billion in the third quarter of 2021, according to the latest UK Dividend Monitor from Link Group.

Payments from companies in the third quarter of the year totalled £39.4 billion, on a headline basis. This represented an 89.2% rise compared to the same period in 2020.

This year’s third-quarter dividend payments are higher than the equivalent period in 2019, when a total of £25.5 billion was paid out.

However, dividends are still lower than they were pre-pandemic, with most sectors having paid less year-to-date than they did in 2019.

Nonetheless, the large increase in payments represents the continued economic recovery since the pandemic lows.

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Headline dividend payments include special dividends. These one-off payments helped drive total payments. Special dividends added £7.2 billion to the headline total.

Drilling down into sectors, it was mining groups that accounted for three-fifths of the total value of special dividends paid, on the back of strong commodity price performance.

However, even without special dividends, dividend payment growth was strong. Underlying payments (that is, excluding special dividends) totalled £27.7 billion, a year-on-year increase of 52.6%.

Mining dividends also led the recovery in underlying payments. The sector’s dividends quadrupled year-on-year to £12.8 billion. Link Group now estimates that mining companies will be responsible for nearly £1 in every £4 in dividends paid to shareholders. Energy companies also saw strong dividend payment growth.

However, while most sectors experienced growth, it was a mixed bag among consumer discretionary companies. Link Group noted that: “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 sidelines.”

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Strong payments in the third quarter led Link Group to upgrade its 2021 overall forecast. Link Group expects an increase in headline payments, owing to more special dividends in the fourth quarter, alongside moderate underlying growth. For the full year, headline dividends are forecast at £93.2 billion, an increase of 44.8% year-on-year. Underlying dividends, meanwhile, are forecast to rise by 22.4% to £77.4 billion.

Prior to the pandemic, dividends hit a record high for a calendar year, reaching £110 million in 2019.

Ian Stokes, managing director of corporate markets UK and Europe at 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.”