UK dividends recovery lags behind other markets

UK companies are expected to lag behind global businesses in restoring their dividends to pre-Covid levels, according to major investors, as many British groups pare down their payouts despite a bumper earnings season. 

Globally, dividends are forecast to bounce back to pre-pandemic levels as early as this year as companies resume payouts that were put off during the worst of the Covid crisis.

However a full recovery in the UK is not expected until as late as 2025, according to separate analyses by asset managers Quilter Investors and Janus Henderson, and funds group Link. 

The UK was particularly hard hit by the dividend drought brought on by Covid, which saw payouts drop by a fifth worldwide, as many companies slashed the cash they paid to shareholders to weather the economic storm. The cuts and slow recovery dealt a blow to pensions, charities and retirees who rely on dividend income, but investors say the reset in payouts could leave British companies in better shape. 

“There’s evidence of companies taking the opportunity to reset payments at more sustainable levels,” said Helen Bradshaw, portfolio manager at Quilter Investors. “In some cases these payout ratios had become stretched to a level that was hard to manage.”

UK companies tended to pay out a larger percentage of their earnings to shareholders than companies in many other countries, which meant companies came under more pressure when Covid struck, Bradshaw said. According to FT data, the historic dividend yield at the end of 2019 was 4.4 per cent for the UK, 1.9 per cent for the US and 2.3 per cent for Japan.

Link’s data showed UK payouts staged an impressive year-on-year recovery, rising 50 per cent from the depths of the Covid crisis in the second quarter of 2020, as companies recovered from the economic shock and uncertainty brought by the pandemic. But they remain one-sixth lower than pre-Covid levels and are not forecast to regain that peak until 2025. 

“The big UK stalwarts are not playing catch-up on dividends, whereas in some countries we are seeing that,” said Ben Lofthouse, head of global equity income at Janus Henderson, which tracks dividends from major companies worldwide. 

Both Janus Henderson and Quilter project global dividend growth will push past pre-pandemic levels by the end of the year. “We are getting more optimistic as we go through the year,” Lofthouse said. 

In the UK, the prospects for recovery are uneven across key dividend-paying sectors, with mining companies coming back strongly thanks to surging commodity prices. Rio Tinto on Wednesday announced a record half-year payout of $9.1bn. Banks have begun to stage a recovery, and regulatory limits of their dividends have been eased. 

UK oil majors have meanwhile chosen to reinvest more cash, partly to fund the transition away from fossil fuels. Shell this week boosted its dividend by almost 40 per cent. But the company, which had been among the world’s largest payers, remains at roughly half the pre-Covid levels. “We felt that our dividend needed to be reset [as] the gap between our dividend payout and free cash flow was simply too large,” said Ben van Beurden, Shell’s chief executive.

Link Group projects that oil companies, which accounted for almost £1 in every £5 distributed by London’s listed companies, will end up paying closer to £1 in every £10 as they settle into the new normal. 

But investors accustomed to relying on payouts from UK companies have not been hit as badly as many feared. Lofthouse said the severity of last year’s cuts, along with a reckoning over how shareholders rank compared to other company stakeholders, led some to predict a sea change in how groups divvy up their takings. 

“It was a really big question last year: is dividend culture dead?” said Lofthouse. But he said companies’ willingness to turn back on the payment taps suggests Covid has not led to fundamental changes. 

Investors said the UK remains an attractive hunting ground for income. Adrian Gosden, investment director at GAM, said the bounce back in 2021 was “meaningful” and “will help focus investor attention on the UK as an undervalued market”.

For shareholders, it may also be good news to see British companies that had excessive payout ratios get back to a sustainable footing. “You don’t want a company that does not invest for the future because it has to pay a dividend,” said Lofthouse. “It’s bitter sweet, but the companies have done the right thing.”