Computershare has lowered its forecasts for UK dividends in 2024 after payouts in the third quarter came in lower than expected.
It now anticipates underlying dividends in the UK to fall 0.3% to £86.8bn by the end of the year, down from the 0.1% growth it had projected three months ago.
But this downgrade is even steeper when compared to Computershare’s initial forecasts at the beginning of the year. In the first quarter, it expected underlying dividends to grow 2% by the end of 2024 to £89.8bn.
Buybacks and a burgeoning pound
Widespread share buybacks in the UK have been one of the main reasons for this sizable reduction, according to Computershare’s latest report.
“Share buybacks represent a valuable means of returning surplus cash to shareholders, but fewer shares in issue mean the total dividend expense is lower,” it said.
“This is not bad news in itself because the cash just comes to shareholders in a different way. In the absence of buybacks, we might reasonably expect that capital might instead be distributed as a dividend.
“Since buybacks have grown markedly in the last few years, dividend growth alone understates the true growth in cash distributions by UK companies.”
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This, in conjuncture with the strengthening pound, is expected to cost the total dividend payout by UK companies £3bn this year.
The Bank of England’s decision to keep rates high for longer than other central banks has boosted it 5.7% against the US dollar over the past year, which has proven a headwind to the two-fifths of UK dividends payers that declare in the US currency.
A strengthening pound caused dividends in the third quarter to come in £706m lower than expected – double what Computershare had forecast, namely due to sterling rallying sharply in the summer.
Cuts to special dividends
The decision for UK companies to cut their special, one-off dividends has also been a source of disappointment to income investors.
Computershare had already anticipated “a quiet quarter” for special dividends at £500m, but this still came in at less than half the forecasted amount at £238m.
See also: UK companies drop special dividends by 79% in 2023
The report said: “Special dividends are very volatile and, because they usually depend on specific corporate actions like a discretionary asset disposal, they are very hard to predict.”
However, the firm expects these special payouts to push total UK dividends over the line this year. Underlying dividends may be forecast to drop in 2024, but headline payouts – which include special and regular dividends – are anticipated to grow 2% to £92.3bn, down from an initial 3.8% estimate.
Declining payouts from miners
Most of the cuts to dividends in the third quarter came from the mining sector, which dropped their payouts by £2.6bn over the three-month period.
Some 90% of this decline was on account of Glencore, which has been preserving cash to fund its recent $6.9bn acquisition of Canadian steelmaker Teck Resources.
See also: Global dividends hit fresh record high in Q2
Computershare noted that “lower profits from weaker commodity prices have played a role too and also explain lower payouts at Anglo American and Antofagasta”.
But cuts from this sector alone are shielding a much healthier outlook for UK dividends. When you exclude miners, underlying dividend growth was actually up 2.5% over the quarter, with the rest of the market increasing its dividends by £298m at the headline level.
Underlying dividends were up 2.5% to £557m over the period without miners, almost half of which came from the pharmaceutical sector thanks to increased payouts from AstraZeneca.
