UK dividends fell 8.1% on a year-on-year headline basis to £25.6bn in the third quarter of 2024, according to the latest Dividend Monitor report by Computershare.
Payouts have not been this low since 2020 when companies aimed at preserving cash. That contrasts with today when the cash has gone elsewhere.
According to the report, the decline mainly reflected “steep” cuts in the mining sector, where payouts dropped by £2.6bn, as well as a stronger pound, unusually low one-off special dividends (but regular dividends were also down 3.5% year-on-year on a constant-currency basis) and hefty share buyback programmes.
These have a double-whammy effect on dividends by both reducing the number of shares on which companies pay dividends and also diverting the cash that they might otherwise have distributed, as Mark Cleland, issuer services chief executive office at Computershare, explained.
“Share buybacks mean companies can return surplus cash to shareholders, but fewer shares in issue mean the total cost of providing dividends is lower. This is not necessarily bad news, because buybacks mean additional cash reaching shareholders, albeit in a different way,” he said.
“Buybacks have grown markedly during the past few years, and therefore need to be taken into account when understanding the overall increase in cash distributions by UK companies.”
Clive Beagles, manager of the JOHCM UK Equity Income fund, added there were also a number of companies who shifted their ‘ex-dividend’ date from late September to early October, such as Phoenix Group.
“This magnified the fall in the third quarter versus last year. Conversely, it will boost the growth rate in the fourth quarter,” he said.
In terms of sector distributions, mining companies knocked a tenth off the UK-wide total for the quarter and made it difficult for other sectors to compensate, the report read.
With banking dividends “broadly flat” between July and September and “stalling momentum” in the oil sector, there were no major drivers to offset lower mining sector payouts. Utilities made the largest negative impact.
The largest positive contributions to dividends in the third quarter came from the pharmaceutical and industrial sectors.
But the reality is not as bad as the numbers might suggest, as dividend growth was “much more encouraging,” according to Cleland.
At an individual company level, median growth in dividends per share was 4.5%, “a little slower than in recent quarters” but this suggested growth across the wider market was “better than the top-line numbers implied”.
Mid-cap companies experienced underlying growth of 3.6%, winning out over large-caps, which declined 4.4%. This was attributed to the relatively strong UK economy in the first half of 2024, to which mid-cap companies are more sensitive.
With the current evidence, Computershare has reduced its dividends forecast for the year, with the final quarter expected to suffer a “much larger impact” than indicators suggested earlier.
The expectation is now for dividends to decline by 0.3% in 2024 (instead of growing 0.1% as previously anticipated). Regular dividends should therefore amount to £86.8bn, while headline dividends (which include one-offs) are heading for growth of 2% to £92.3bn. The previous estimate was £93.9bn. During the next twelve months, the report expects UK equities to yield 3.7%.
However, next year the figures could improve. “The conflict in the Middle East has already begun to drive oil prices higher. The range of possible outcomes from this is wide, but higher prices boost profitability in the oil sector and potentially push up dividends in 2025,” Cleland said.
“With the worst of the cuts in the mining sector likely now behind us, broad-based dividend growth from the rest of the market will be easier to see in 2025.”
Beagles noted he expects “flattish” dividend growth in 2024 among his own portfolio companies; but noted this number is now skewed “slightly to the upside” and could improve to as much as 2% with strong fourth quarter figures.
“In 2025, we expect a marked acceleration in dividend growth towards the fund’s long-term average (circa 9% per annum),” he said.