UK dividend payments fall for second quarter in a row – but don’t blame coronavirus

The last time two consecutive falls in dividend payments were recorded was during the global financial crisis over a decade ago.

Headline dividend payments in the first quarter of the year have fallen to by 11% on a year-on-year basis, according to the latest UK Dividend Monitor from Link Group.

In the first quarter of the year, UK companies paid out a total of £17.5 billion in dividends, which was down from £19.6 billion during the same period in 2019. This represented the biggest year-on-year decline in four years.

This fall was largely driven by the unusually large number of special dividends (that is, one off dividends) in the first quarter of last year.

However, on an underlying basis (stripping out special dividend payments), the amount paid out still fell. The first three quarters saw total payments of £17.4 billion, a decline of 0.7% compared to the same prior period. This represented the second quarterly fall of UK underlying dividend payments in a row. The last time two consecutive falls were recorded was during the global financial crisis over a decade ago.

Given the recent string of high-profile announcements of dividend cuts and pauses, it would be tempting to view this decline as due to coronavirus and the associated economic impact. However, these recent cuts are for dividends to be paid later in the year and will not have made a mark on the figures for the first quarter of the year.

Instead, the decline in payments reflects a fall of earnings among UK companies since mid-2019. As Link points out: “UK plc has now endured its third consecutive quarter of falling profits, indicating an earnings recession even before the Covid-19 crisis hit.” 

On top of this, the recent weakness of the pound helped prevent what would have been an even bigger decline in dividend payments. Link points out that measured by value half of dividends were declared in dollars or euros. Had sterling not slid as much as it did in those three months, there would have been an “exchange rate penalty” of around 1%, Link estimates.

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Link notes: “Instead, the pound weakened, providing a one percentage point boost to the translated sterling equivalent. On a constant-currency basis, therefore, in the first quarter underlying dividends fell 1.6% and headline fell 11.9%.”

Mid-cap companies saw the most severe declines in underlying dividend payments, driven by on average worse earnings. This was the result of greater exposure to the UK economy which had seen particular weakness due to Brexit fears.

However, Link points out that the dividend decline in the first quarter of the year is relatively modest given the size of the decline in UK profits. They note: “This is one of the real benefits for income investors. UK companies have discretion over how much they distribute to shareholders. Most operate a progressive dividend policy which keeps dividends steady in bad times and grows them in good times. Cuts are usually a last resort.”

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Unfortunately, income investors can expect further declines in payments in the coming quarters, as the economic impact of coronavirus continues to be felt. As of 5 April, 45% of UK companies have scrapped payments totalling £28.2 billion for between the second and fourth quarter of the year. Link estimates that a further £23.9 billion are “at risk” of being cancelled or cut.

In their best-case scenario, Link estimates dividend payments declining by 27% for 2020, leaving total payments at £71.9 billion. Their worst-case scenario is for dividends to decline by 51%, leaving payments at £48 billion.