UK Dividends soared to an all-time high in the second quarter of the year as companies paid out £37.8 billion. But special dividends and a weaker pound are masking underlying weakness in the market, warns the Link Group Dividend Monitor.
On the surface, dividends climbed 14.5% to an all-time high in the second quarter of 2019, beating the previous record, set two years ago, by some £4.4 billion. But, in its latest quarterly report on the state of the UK dividend market Link says the quality of this growth was poor and a number of exceptionally large special dividends from the likes of Rio Tinto (RIO), Micro Focus International (MCRO) and RBS (RBS) have skewed the picture. Special dividends totalled £5.4 billion in the quarter – 147% higher than a year ago.
Banking dividends increased by two-thirds, boosted by a £903 million special from RBS and Barclay’s largest pay out since the financial crisis. In total, the sector paid out £7.5 billion in the quarter, up 40% from a year ago. Pay outs from the oil sector also increased, but this was largely driven by exchange rates. Firms in the sector paid out £4.9 billion in the quarter, while mining firms paid out £6.4 billion.
The retail and property sectors fared less well as the travails of the high street and uncertainty over Brexit’s effect on the housing market hit profits. Total dividends from the general retail sector were £173.4 million in the quarter, down 56% from a year ago, not helped by the fact shopping mall operator Intu scrapped its final pay out. Pay outs from property firms were down 39% year-on-year at £738.7 million.
Underlying dividends, which exclude specials, were up 5% to £32.4 billion. Michael Kempe, chief operating officer at Link Market Services, said: “Investors are being dazzled by eye-catching special dividends and exchange-rate trimmings, but the UK’s dividend clothes are starting to look a bit threadbare underneath.”
He warns that corporate profits are under pressure, which will limit the scope for companies to increase their pay outs over the coming months. Overall, Link expects pay outs to climb by just 2.9% this year, about two-thirds of which is likely to come from gains made through exchange rates.
Earnings growth in the UK is among the lowest globally and economic growth has also been disappointing. Link says: “Our underlying forecast [for dividends] has dropped by £500 million to £98.7 billion. This means that the true picture for dividends this year is significantly weaker than a first glance might suggest.”
The overall yield on UK shares is around 4.25, down from 4.8% in January but still high by historic standards. The yield has come down as share prices have climbed in recent months as a weaker pound has helped boost overseas earnings.
The top five dividend payers for the quarter were Rio Tinto, HSBC, Royal Dutch Shell (RDSA), BP (BP) and Micro Focus International, accounting for 29% of the total pay outs in the period. Of these, BP is the only stock to feature in the Morningstar UK Sustainability Dividend Yield Focus Index, which focuses on the 25 FTSE firms with the most sustainable pay outs. BP, which has a four-star Morningstar rating, has a high uncertainty rating and a narrow economic moat.
