UK dividends hit £27.2bn in the three months to 30 September, according to the Capita UK Dividend Monitor, up 6.8% year on year. This was a record for the period, and the third largest quarterly sum ever paid. Underlying growth (excluding special dividends) was 5.9%.
The financials sector posted the strongest growth, mainly attributable to Lloyds Bank’s first interim dividend since the financial crisis and a special dividend from Direct Line. Payouts were also buoyed by the strong dollar, which added £600m to the final total. In particular, this helped the oil, gas and mining sectors, where many companies declare dividends in US dollars.
Headline forecast for 2015 are unchanged at £87.2bn. The cut by Standard Chartered in the fourth quarter will be offset by the strong special dividends seen in the third quarter.
However, Capita cut its forecast for 2016. It now expects total dividends to be £84.8bn, a cut of £200m. The group said dividend cover was falling in the UK market, adding: “This is mainly, but not entirely, because of the UK’s heavily commodity-dependent stock market, dominated as it is by large oil and mining companies. The collapse in their profitability in particular has meant dividend cuts from some are inevitable. Glencore is one such casualty, but there will likely be others.”
There are other vulnerable sectors: The supermarket price war has dented dividend payouts across the retail sector. Tesco was forced to abandon its interim dividend, following a 55% fall in its first half operating profits. Sainsbury’s was also forced to cut.
There is still a significant gap between the progress of the mid and large cap sectors. Although large caps pay a higher absolute return, mid caps increased their payouts 30.8% on a headline basis, the fourth consecutive quarter of double-digit growth. In contrast, the top 100 only grew their dividends 4.1% year on year.
Scott McKenzie, manager of the Saracen UK Income fund, said: “The outlook has certainly got worse for dividends in the UK, particularly among some of the very large companies. The mid-cap sector has been more exposed to the UK economy, which is doing fine, and less exposed to the commodities cycle. They have also tended to have stronger balance sheets and less debt.”
