Income investors in need of company dividends could be in line for a disappointing year in 2022, according to AJ Bell investment director Russ Mould, who has predicted growth will slow markedly next year.
So far in 2021, dividends are up 32% on 2020, when companies conserved cash to stay afloat as the pandemic’s lockdowns ground the economy to a halt.
In total, UK stocks are expected to pay out £81.8bn this year in dividends (excluding special dividends), compared with £61.8bn last year.
Total dividends paid year-on-year
Source: AJ Bell
However, “a drop in industrial and precious metal prices, and particularly iron ore and copper, has weighed on forecasts from the all-important mining sector”, Mould said.
Indeed, while the mining sector accounted for £11.1bn more in dividends this year, this is expected to drop by £2.1bn in 2022. Overall, he expected total pay outs of £83.7bn next year, a 2% increase on this year.
Rio Tinto is expected to cut its dividend by around £2.7bn, while Anglo America, Evraz Antofagasta and BHP Group could all slash their pay outs, Mould said.
He also warned that a renewed drop in economic activity, whether that be from a resurgence of Covid fears, continued inflation or central banks removing stimulus too quickly, could also pose significant risks to dividends.
Mould said analysts are predicting that net profit for next year will beat the all-time current high of 2011, when miners and oil producers generated 42% of the FTSE 100’s profits.
“Oils and consumer discretionary stocks are expected to drive the forecast 6%, or £14.2bn increase in aggregate FTSE 100 pre-tax profit for 2022,” he said.
However, “if the economy offers little or no assistance – or even hinders – then these earnings forecasts, and by extension, dividend payment estimates could find themselves exposed to the downside”, he added.
But there are also positives. Glencore is set to buck the mining-sector malaise, increasing its dividend by £1.5bn, while the banks – including HSBC, Lloyds and Barclays – should also add to their pay outs.
Despite the sluggish growth, investors should also feel more secure with their income, as dividend cover is improving, according to Mould, who said that this was one reason why pay outs may be slowing.
“Companies may be choosing to let earnings growth outpace dividend growth so they can reinvest in their businesses, bolster balance sheets and rebuild cover, so that their shareholder distributions are not quite the hostage to fortune that they proved to be in 2020, should another unexpected shock emerge from left field,” he noted.
Indeed, the aggregate earnings cover ratio for the FTSE 100 is expected to rise to 1.95 times in 2022, according forecasts, up on 2021’s 1.85 times and 1.59 times in 2020. This is then anticipated to rise to 2.03 times in 2023, the highest level since 2014.
Total dividend cover year-on-year
Source: AJ Bell
If companies do not increase their pay outs, there could be an additional benefit from share buybacks – something commonly used by US companies to increase their share price.
“It also remains to be seen whether companies start to lean more toward share buybacks when it comes to returning cash to shareholders, in light of the UK government’s 1.25 percentage point increase in dividend taxes, or whether the pensions’ regulator’s threat to challenge dividend payments made by firms with pension deficits affects boardrooms’ dividend policies,” he said.
Indeed, 22 of the 100 largest UK companies are set to buy back £18.7bn in shares this year, while FTSE 100 giants Royal Dutch Shell – the oil major – and drinks company Diageo have announced share buyback schemes in 2022.