“Worst is behind us” after UK dividends halve in Q3, finds Link Group

recovery

UK dividends are showing “positive signs” of a future recovery after almost halving to a headline total of GBP18 billion in the third quarter of 2020, according to the latest UK Dividend Monitor from global financial administrators Link Group. 

Over the past three months, dividends have slumped by 49.1 per cent, making it the lowest third quarter total since 2010, when the UK was suffering the aftermath of the Global Financial Crisis.

“Though by any normal standards a fall of this magnitude is terrible for investors, it is significantly better than the 57.2 per cent drop in the second quarter,” writes Link Group.

Banks accounted for almost two fifths of the GBP14.5 billion cuts in the third quarter of 2020, as they remain barred from paying dividends by the Bank of England until 2021. 

Meanwhile, the oil sector contributed another fifth to the cuts, which Link Group says will be “longer lasting” than the cuts made by banks. The UK’s oil giants, Shell and BP are making a “permanent change” in order to ensure that they are able to sustain dividend payments in the future, as they respond to changing energy priorities. 

“The good news is that the worst is now behind us and the fourth quarter should look a little better than the third,” writes Link Group.

For 2021, Link Group suggests a “best-case” dividend increase of 15 per cent for, totalling GBP69.6 billion, which would bring income back to levels last seen in 2013. 

“This is partly because those companies that want to cut have already done so, limiting the downside to our figures. But it also reflects the likely restarting of dividends by companies like Bunzl and Land Securities; those like Ferguson, Softcat, and Bodycote which intend to catch up on payments missed earlier this year too; and positive signs from firms as diverse as Diageo, Hargreaves Lansdown, and Biffa, all of which we had marked as vulnerable to Q4 cuts.”

On the other hand, a “worst-case” scenario delivers a 6 per cent increase to a total of GBP63.5 billion, last seen in 2012.

British American Tobacco is set to become the UK’s top dividend payer in 2020, supplanting the UK oil majors and HSBC, which is currently barred from paying dividends. 

Link Group notes says that the “huge uncertainty” of the ongoing pandemic is likely to spell more sharp year-on-year declines in dividends into the first quarter of 2021. 

“We reach the peak-to-trough decline on the anniversary of the first lockdown at the end of Q1. Thereafter, the comparisons will start to look more favourable and we expect to see the start of a bounce back,” Link group continues.

“Oil dividends will not increase significantly (if at all), so the big question will be whether the Bank of England permits the banks to begin distributing again. Beyond the obvious economic impacts on their trading, the extent to which companies in other sectors have taken government support will influence their freedom to pay shareholders too.”

In 2020, Link Group estimates that headline UK dividends will fall to GBP61.2 billion on a best-case basis or GBP60.6 billion on a worst case basis, a decline of 44.6 per cent and 45.2 per cent, respectively.