For the first time in three years, the headline rate of UK dividends has slipped back.
According to the latest quarterly dividend monitor from Link Asset Services, UK headline dividends fell by 2.1% in the second quarter.
The report shows headline dividends fell by a total of £32.6bn year-on-year, mainly the result of fewer special dividends being paid.
Link reported that special dividends paid by UK companies were reported at £1.9bn during the second quarter. This is still seen as ‘healthy’ but is lower than the above-average £3.2bn of special dividends paid to investors in the same period last year.
Link Asset Services, which is an administration solutions provider, explained in its report that this quarterly fall in dividends was not ‘cause for alarm’.
Underlying dividends, excluding special dividends, rose sharply by 7.1% in the second quarter to reach a record £30.7bn.
The mining sector displayed especially strong growth this year, with headline dividends rising by 95% in the quarter. Miners including Glencore, Rio Tinto, Anglo American and Mondi paid out a collective £1.9bn more than during the same quarter a year earlier.
The report said:
“As more mining companies move away from a progressive dividend policy that can be impossible to sustain when commodity prices slump, and towards policies that link dividends more explicitly to profits, so we can expect their dividends to be much less predictable than in the past.”
“The mining sector is unusually large on the London Stock Exchange compared to most other large markets, making its share of UK dividends much greater than elsewhere.”
The biggest dividend payer in the second quarter was banking group HSBC, followed by Royal Dutch Shell, Rio Tinto, BP and Lloyds Banking Group. This top five paid out a collective £8.8bn during the second quarter.
According to the report, the total amount of dividends paid out by FTSE 100 companies fell by 3.9% year-on-year in the second quarter. FTSE 100 companies paid out a total of £27.3bn, with the fall also attributed to fewer special dividends being paid compared to last year.
Companies in the FTSE 250 saw an increase in dividend payments of 6.4% to £4.3bn in the second quarter.
The report said:
Top 100 dividends fell 3.9% year-on-year in the second quarter to £27.3bn. This was mainly due to the big special dividend National Grid paid last year, though exchange-rate effects and the timing change at BAT also played a role.
Adjusting for all these factors, top 100 dividends were actually 14.3% higher. The mining sector made up two-thirds of this increase.
Over the longer-term, mid-cap dividend growth has been slightly higher than the top 100, as these companies are often less mature and so have further to run than their larger counterparts. But they also tend to be more domestically focused, and so may be suffering from slower growth in the UK economy.
Looking ahead, Link is forecasting headline dividends of a record £97.8bn this year, which is up from a forecast of £96.3bn last year.
Underlying dividends are forecast to rise from £90.4bn to £94.1bn in 2018.
Commenting on the report, Justin Cooper, chief executive of Link Market Services, said:
UK plc’s profitability is on a firmer footing, and though there are still points of weakness, overall, profits now comfortably cover dividends. Balance sheets are also getting stronger. This is giving companies more headroom to return cash to shareholders.
The miners might be digging deepest, but the rest of UK plc is coming up with the dividend goods too. Three-quarters of sectors saw growth on the back of improving profits, and income investors are set for another record year in 2018.