Investors have been going through a bumpy 2022 so far but UK dividends were strong in the second quarter of the year, the latest Link UK Dividend Monitor report shows.
After a bumper first quarter, the second quarter of 2022 did not disappoint as the headline total of dividend payouts jumped 38.6% year-on-year, reaching £37bn.
But investors should not be carried away. In spite of solid dividend programmes and a positive outlook for the rest of the year, the core forecast for the third quarter was adjusted down in consideration of waning “positive calendar effects”, making progress harder in 2023.
As the report outlines, the biggest dividend-paying sectors were mining, banks and oil, which, in aggregate, accounted for three-quarters of the Q2 year-on-year increase.
Mining companies in particular took over as the biggest payers. According to Link Group UK and Europe corporate markets managing director Ian Stokes, this was on the back of favourable cyclical fluctuations and rising mining profits.
Dividends from this industry have been the biggest engine of growth in the past two years and Stokes expects miners to remain at the top of the list for at least the rest of the year. But their 37% year-on-year increase on a headline basis came in slightly below Link Group’s forecast, stirring concerns that they might have peaked.
“If mining dividends have indeed now peaked, they will act as a brake on UK dividend growth in the next 12 months having provided the main engine over the last 24,” Stokes said.
Price of commodities year-to-date
Source: Bloomberg
The second biggest payer was the banking sector, reflecting the release on payout constraints by the Bank of England. Banks accounted for two-thirds of the dividend increase and are expected to regain their position as the third largest dividend-paying sector this year for the first time since 2019.
Third best was the oil sector. Its dividends increased 41% in the second quarter of 2022, but they are still at half their peak of 2019. At a time when oil prices are a politically sensitive topic, Shell, BP and other companies are choosing more discreet share buybacks to generate surplus, rather than distributing and committing to higher dividends.
It was a “very good” second quarter for housebuilders, industrial goods, media, travel, and general financials, spurred by the ongoing post-pandemic normalisation.
Dividend programmes that had come to an halt have now resumed and surplus is being distributed again in the form of large, one-off special payments, which totalled £5bn and drove the growth.
This form of pay-out was mostly adopted by financial and insurance firms, with Aviva leading the way, and mining companies.
External factors like currency movements also spurred dividends denominated in US dollars, which generated an exchange rate boost of £1.4bn.
The weak sterling added “significant impetus”, according to Link Group analysts.
“Exchange rates are acting powerfully to boost the sterling value of payouts. If the currency just maintains its current level for the rest of the year, it is set to have its worst ever year against the dollar, meaning more exchange rate boosts to sterling pay-outs in Q3 and Q4,” they said.
Basic consumer goods and pharmaceuticals were responsible for the weakest growth, the former having delivered a small decline in pound sterling terms (but a steady course in euro terms), and the latter having experienced significant corporate changes.
UK dividends on a full-year basis
Source: Link Dividend Monitor
Looking ahead, investors should watch the mining sector closely.
“The industry has confounded expectations more than once before, bending their stated dividend policies at important moments, so this introduces a significant level of uncertainty,” said the report.
Rio Tinto, a key industry bellwether, has yet to announce its next dividends, with analysts suggesting a decline compared to the third quarter of 2021.
The prospect of a recession is also worrying.
A recession would crimp the ability and willingness of many companies to raise dividends, especially mid-caps. FTSE 250 companies increased payouts by 16.5% compared to the 27.1% of FTSE 100 companies.
Offering an outlook for the current quarter, the report said: “For the third quarter, we expect an increase of 12.5% compared to 2021 and another £3.5bn of special dividends between now and December. After such large one-off specials in Q3, we now expect headline dividends for the full year of £96.3bn, up 2.4% year-on-year.”