UK dividends are unlikely to match their pre-Covid highs until 2025 “at the very least” and payouts could fall for a second consecutive year, Link Fund Solutions has warned, as climbing coronavirus cases and renewed lockdown measures paint a bleaker picture for the year ahead.
UK plc dividends stood at £61.9bn at the end of 2020, according to the firm’s latest Dividend Monitor – down 44% from 2019 and the lowest annual total since 2011.
Between Q2 and Q4, two thirds of companies cancelled or cut £39.5bn worth of dividends compared with a quarter of businesses that increased payouts. The remainder held dividends steady.
Though Link said the worst of the Covid-induced dividend cuts were over, the resurgent pandemic and renewed lockdown mean the outlook for 2021 is “significantly more subdued”.
In its best-case scenario, payouts would rise by 8.1% to £66bn on an underlying basis this year, with special dividends taking the headline figure up 10% to £68.1bn. But in its worst-case scenario, payouts would fall for a second year in a row to £60.7bn, or £61.5bn including special dividends.
This means UK stocks would be yielding between 2.8% and 3.1% this year.
“The social and economic scars of Covid-19 will be deep,” said Susan Ring (pictured), CEO corporate markets of Link Group.
“We think it is highly unlikely dividends can regain their previous highs until 2025 at the earliest, and potentially even a year or two after that.”
Vaccine roll-out will accelerate earnings recovery
Despite Link’s bleak projections, some UK equity income managers have remained more optimistic about the prospects for dividend growth this year.
Simon Young, manager on the Axa Framlington UK Equity Income fund, is forecasting dividend growth of 5% to 10% in 2021, off expectations the vaccine roll-out will boost the chances of an earnings recovery.
“Last year was an annus horribilis for UK dividends, and these latest figures are in line with forecasts of a sharp drop-off in payouts,” Young said.
“However, after such a big decline in income levels from UK plc, we have effectively had a big reset for many companies. We expect a vaccine roll-out to improve the outlook for economic growth globally and hasten a recovery in earnings – and thus dividends – in 2021.
“Headwinds remain, not least the impact of FCA rules on bank dividends, and this will weigh on the rate of dividend growth from UK equities this year. Nonetheless, despite the cuts, the starting dividend yield for the FTSE All-Share is above 3% and we expect dividend growth of 5% to 10% this year.”
See also: Gam’s Adrian Gosden says UK is ‘past the worst’ of dividend cuts
Significant pick-up in dividends unlikely until 2022
Henderson High Income Trust portfolio manager David Smith expects to see “pockets of strong dividend growth” this year, although he does not think a significant pick-up is likely until at least 2022.
“The data confirms what an incredibly tough year 2020 was for income-seeking investors, however, Q4 showed a glimpse of better times ahead with a return of some previously suspended dividends,” Smith said.
“It’s likely that more companies will continue to return to the dividend register in 2021 but at low levels as companies remain cautious until there is a clearer path for cashflows to recover and balance sheets to be repaired.”
Smith added the projected 3.1% dividend yield in Link’s best-case scenario was “still attractive” and likely to be “more sustainable” going forward.
Link’s Ring expected the biggest upside this year would come from the banks – the financial sector accounted for two fifths of the £39.5bn Covid cuts as the Prudential Regulation Authority put pressure on banks to suspend their payouts.
“They will only partially restore their dividends, but it matters more how quickly they do so, rather than exactly how much they pay,” she said. “By contrast, the £11bn reduction in oil dividends by March will take several years for the wider market to make up.”
