UK dividends soared to £34.9bn in third quarter of 2021
By Rob Griffin
14:12, 25 October 2021
The dividends UK investors received hit £34.9bn ($48m) during the third quarter of 2021 – up 89.2% year over year, according to a new report.
The Link Group’s UK Dividend Monitor partly attributed this performance to the mining sector boom and some large one-off special payouts.
Here we analyse which sectors benefited the most from this uptick in fortunes and how long this is likely to last.
Setting figures in context
The first point to note is the strong percentage increase is in comparison to the pandemic-hit third quarter of 2020, during which payouts halved.
The large rebound in the latest quarter is still not enough to restore dividends to full strength, taking the headline total only a little higher than the level last seen in 2018. In fact, most sectors have paid less year-to-date than they did in 2019, according to the study.
Also, while large, one-off special dividends were partly responsible for the unexpectedly large increase, even when they were stripped out, the rise was 52.6% to £27.7bn.
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Bolster balance sheets
Ian Stokes, Link Group’s managing director for corporate markets UK and Europe, said companies had delivered more in dividends than was believed possible at the start of the year.
He also pointed out that companies were progressively less affected by each lockdown and the action taken to bolster balance sheets resulted in strong dividend firepower.
“The boom in special dividends reflects how some companies are making catch-up payments, some are capitalising on very strong demand and others are seizing the moment to sell assets at a time of high prices and numerous cash-rich potential buyers,” he said.
Mining sector booms
Mining companies were responsible for three quarters of the outperformance as higher commodity prices earlier in the year meant the big groups reported record profits.
The £12.8bn mining total for the third quarter was more than the next five largest sectors combined.
“For the full year, miners will be responsible for nearly £1 in every £4 distributed by UK-listed companies,” noted the report.
Special dividends
Special dividends were substantial in the third quarter reaching £7.2bn, of which the majority came from the mining sector.
Five mining companies paid specials totalling £4.3bn, according to the report, with Rio Tinto’s and BHP’s being the largest.
“The industry benefited from extremely high commodity prices earlier in the year and has distributed some of the excess profits these generated,” stated the report.
Asset disposals
Elsewhere, large special dividends also resulted from asset disposals as companies returned the proceeds to shareholders.
Water utility company Pennon sold waste management subsidiary Viridor to private equity firm KKR – and distributed £1.5bn of the proceeds by way of a special dividend.
Another £729m came from Melrose on the sale of its heating, ventilation and air conditioning subsidiary Nortek.
Meanwhile, housebuilder Berkeley Group reinstated the big special dividend, worth £454m, that it had suspended at the very last minute in March 2020 as lockdowns were implemented across the UK.
Sectors and companies
Apart from mining corporations, banking dividends also made a very large contribution to growth, according to the report’s findings.
“They were banned this time last year, so their restoration is making a big splash, even though pay-outs remain well below pre-pandemic levels,” noted the report.
It also pointed out that this was likely to change, with HSBC having already “signalled an intention” to significantly increase its dividend next year.
Oil and gas
The study also suggests the seven-year high for oil prices was “mitigating the worst” of the cuts from this sector last year.
“Shell has already restored its dividend to half its former level, up from just one third at the beginning of the year,” said the report. It also suggested that the rebound in energy prices would add at least £800m more to UK dividends this year.
Elsewhere, the general retail sector had a very difficult pandemic with some of the steepest cuts of all. Payouts bounced back in the third quarter thanks to the restoration of Kingfisher’s dividend.
Dividend growth levels
On an underlying basis, dividend growth was similar across the top 100 and mid 250 companies, according to the report, with payouts up 51.8% and 54.4%, respectively.
However, the very large special dividend from Pennon meant headline growth was far faster for the mid-caps.
“Moreover, the year-to-date recovery in the mid-caps has been twice as fast as among the top 100,” it added. “This is normal for smaller companies in an economic rebound, as they are typically more sensitive to the economic cycle.”
Outlook
The report noted that while the “unbalanced nature” of the latest quarter made it impossible to maintain this pace of recovery, it was still a “cause for celebration” among income investors.
Looking ahead, Link Group expects headline dividends of £93.2bn for the full year, which represents an increase of 44.8%.
Underlying dividends, meanwhile, are set to rise 22.4% to £77.4bn.
Read more: UK dividend stage second-quarter comeback
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