Third-quarter earnings season is a tricky one for UK income investors, not least because they may have the feeling that the real drama is occurring off stage. There are plenty of companies reporting a range of numbers, share prices are swinging around, but relatively little is being said about dividends per se – and there hasn’t been a great deal of movement among big names like Unilever that do pay quarterly dividends. There’s the sense that the real action is at the start of the 2024, when companies report full-year figures and final dividends are announced. Then we’ll know how much UK companies have paid in 2023, and how that compares with previous years.
That’s not to say there aren’t plenty of talking points from the last few weeks. Shell is one of them, with more buyback promises and an an annual rise in its Q3 dividend. Oil companies are doing well from the second conflict in as many years, and while Shell isn’t on our dividend screen, its dominance in the FTSE 100 dividend payers is hard to ignore.
Also off list is retailer Marks & Spencer, which has just restored its dividend after a multi-year pause. The dividend, though small at 1p per share, also buoyed investors. “The yield is relatively low, but it marks a moment of significance for the group, and it’s a real statement of confidence around the outlook for the business from M&S’ management,” said Aarin Chiekrie, equity analyst at Hargreaves Lansdown.
Apart from natural resource companies – and indeed M&S – FTSE 100 share prices have been under pressure since the October outbreak of the Israel-Hamas conflict. Naturally this has lifted yields, without any real movement in dividend payments. The majority of share prices are negative in what has been an uninspiring year for UK stocks. The FTSE 100 was above 8,000 points at the start of the year but is now below 7,400, and overall the index is down 2% this year. So the share price moves of our dividend names should be put into this context.
The nudge higher in yields means that we welcome back two previous mainstays of the list, Burberry and Smith & Nephew, which have just made it over our 3% yield hurdle rate.
While the Bank of England held rates last week at 5.25%, rates seem unlikely to fall back sharply even if inflation drops. So setting 5.25% as our notional hurdle rate cuts the list in half. And for comparison, UK two-year gilts yield 4.62% and cash interest accounts pay around 5%.
These are basic comparisons, however. Income investors are really looking for some combination of capital gains and income, so BT and Reckitt would have been your best bets at the start of this year.
Starting at the top of our list and working downwards, BT left its interim dividend unchanged at 2.31p per share, while Lloyds Banking Group, Schroders, WPP, Reckitt Benckiser and Smith & Nephew released no new dividend information in their market updates. Pharma company GSK maintained its quarterly dividend at 14p a share, the same as in the first and second quarters.
Unilever also held its dividend at the same amount in euros as the previous quarter and in Q3 2022. This €0.4268 figure may seem familiar to investors as it’s the same figure they’ve received since Q4 2020, the period when the company simplified its legal structure under Unilever PLC.
Looking Ahead
Next week we get updates from big-yielding Imperial Brands (IMB) and fashion firm Burberry.
We’ll have one more monthly dividend update before the end of the year, when we’ll look at the outlook for 2024. Certainly it seems that overall UK income investors won’t have a vintage year, barring a big increase in Q4 payouts. Computershare’s quarterly Dividend Monitor forecasts headline dividends (which including one-off special payments) to fall by 3.4% to £90.6bn in 2023.
The company, which regularly monitors changes in income payouts across the whole market, says that the falloff in specials from mining companies is balanced by a rise in buybacks (of which Shell was a recent prominent example).
Computershare says that the underlying dividend growth rate now looks set to reach 5.4% for the year on 2022 levels; an improvement of course, but 50 basis points less than the the forecast three months ago. This means regular dividends are expected to rise to £88.5bn for the full year.
We’ll of course have a better idea of 2023’s performance at the start of 2024.
Methodology:
To make it on to our monthly list, FTSE 100 companies need now to have a narrow or wide economic moat and pay a dividend and have a forward yield of 3% or more. This is now below the Bank of England base rate, which stands at 5.25%. We changed our methodology last year, introducing a hurdle of 3%, but there’s an argument for raising this to 4% - that would leave eight companies from a potential cohort of 100.
A note on gain/loss YTD figures; these are total return figures so include dividends paid. In some cases (such as (GSK), the income has pushed the total return into positive territory after a negative year for the share price; in others (BATS), the income has offset some of the capital losses. More up-to-date 2023 share price figures are available online.
