‘The economic skies are decidedly gloomier’ – Link’s latest UK Dividend Monitor shows dividends facing headwinds for 2023

by | Jan 30, 2023

UK dividends ended 2022 8.0% higher on a headline basis at £94.3bn, according to the latest UK Dividend Monitor from Link Group.

Volatile special dividends were sharply lower year-on-year so the underlying total, which excludes these one-offs, rose 16.5% to £84.8n.

Over the course of the year, almost every sector delivered growth, while the weakness of the pound provided an additional £3.8bn boost to payments declared in dollars. Mid-caps grew dividends faster than the top 100 as they recovered sharply from steep pandemic cuts. Moreover, companies bought back record numbers of their own shares, equivalent to 2% of UK plc market capitalisation, and over half the value of dividends paid during the year.

Resurgent banking dividends were the most significant driver of growth in 2022, accounting for one quarter of the underlying increase during the year. Elsewhere, booming energy prices pushed oil payouts a fifth higher, despite huge share buybacks presenting an alternative route for surplus capital to reach shareholders. Link Group estimates that Shell alone repurchased £16bn of its own shares, almost one third of the UK plc buyback total and significantly more than it distributed in dividends.

Miners reached an inflexion point in 2022. Record payouts meant they still made a contribution to growth over the course of the year, and were the largest dividend-paying sector for the second year running. But by the second half of 2022 lower prices for a number of major commodities had begun to have an impact on dividends, pushing them down by a fifth on a headline basis.

The year ended on a softer note. Q4 payouts of £12.4bn were 5.0% lower year-on-year on a headline basis, impacted by much lower special dividends and a stronger end to the year from the pound. The diversion of record cash to share buybacks played a significant role too, particularly in the oil, tobacco, food and retail sectors. Underlying growth in Q4 was 7.0%.

For the year ahead, dividends will rise more slowly as economies around the world slow or shrink. Mining payouts, which have been a powerful engine of growth in the last two years, are likely to fall, though the extent of this decline is very uncertain. Across the wider market, the drag from 2022’s record share buybacks will hold back dividend growth by at least one percentage point. Link Group expects underlying dividends of £86.2bn in 2023, an increase of 1.7% year-on-year. On the assumption that special dividends revert to a typical year average, headline payouts will fall 2.8% to £91.7bn.

Link Group expects UK plc to yield 3.7% for the next 12 months. The rally in share prices in recent weeks has pushed yields down, narrowing the gap between equity yields and other assets to the narrowest in over a decade. Today fixed income offers 3.6%, based on the UK 10-year gilt, and instant access savings 2.7%. This time last year they offered 1.2% and 0.7% respectively.

Ian Stokes, Managing Director, Corporate Markets UK & Europe at Link Group said: “The economic skies are decidedly gloomier both in the UK and around the world than this time last year. Company margins in most sectors are already under pressure from higher inflation and squeezed household budgets. Soaring interest rates are now crimping profits by raising debt-service costs too. This will leave less money for dividends and share buybacks in many sectors.

“We do expect underlying dividends to grow in 2023, however. Even with lower mining payouts, there is good growth coming through from the banks and oil producers and across the wider market, cuts made during the pandemic mean payout ratios are conservative on the whole. Companies would also rather reduce share buybacks than cut dividends as cutting dividends is a very negative signal to give to the market. With the former so high, there is plenty of wiggle room. Finally, UK plc enters the recession with profits at a comfortable level compared to dividends and this will provide support.”

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