UK dividends hit record high last year but 2018 ‘will feel sluggish’
The figures for 2017 have smashed the previous high recorded in 2014, beating expectations of £94bn.
Dividends were buoyed by resurgent mining companies, exchange rate gains and one-off specials. One-off special dividends were worth £6.7bn with nearly half coming from National Grid (£3.2bn).
Underlying dividends (excluding specials) were also up 10.4% to £87.7bn, representing the fastest growth rate since 2012. The mining sector accounted for nearly half the £8.3bn annual increase, while £2.1bn came as a result of weak sterling. This is because a large proportion of UK dividends declared in US dollars and euros was translated at more favourable exchange rates.
According to Link Asset Services Dividend Monitor, the exchange rate gains were enjoyed in the first half of the year but by Q4, the gains turned to losses of -£480m as the pound strengthened against the dollar.
Link Asset Services also found that in the last quarter of 2017, dividend growth slowed dramatically, inching ahead only 1.1% on a headline and underlying basis to £17.0bn. This is due to companies such as HSBC, Shell and BP freezing dividends in dollar terms in recent years. They account for two-fifths of all Q4 dividends and it was difficult for other companies to make up the growth. Sky cancelled its £360m Q4 dividend with its future ownership in question.
The growth for mid-cap companies was significantly faster than the top 100 on an underlying basis (14.6% v 10%), helped by housebuilders, consumer goods, leisure, telecoms, and property. However, retail and media lagged behind. Overall, 13 sectors raised their dividends year-on-year in 2017, compared to six that saw them fall.
Turning to 2018, Link expects top 100 dividends to continue to lag their mid-cap counterparts, due to the absence of growth among the very largest payers. Overall, growth will be slower in 2018, as mining dividends have now almost fully recovered. Special dividends are also likely to be lower in 2018, and, if the pound maintains its current exchange rate against the US dollar and the euro, most of the exchange rate gains of 2017 will be reversed in 2018.
Link expects underlying dividends (excluding specials) to rise 3.1% to £90.4bn. With an estimated £5.5bn of specials, headline dividends will reach £95.9bn, an increase of 1.6% year-on-year. The prospective yield for 2018 is 3.5%.
Justin Cooper, chief executive of Link Market Services, said: “Record dividends and new highs for share prices gave investors real cause for celebration in 2017, even if one-offs and exchange-rate gains were part of the story.
“Beneath the surface, slower but steadier growth continued in the wider market. 2018 may feel like a hangover after 2017’s excesses, as exchange gains are currently set to reverse, specials are likely to fall, and there is nothing on the horizon to match the scale of the mining bounce-back. But there is no reason to be pessimistic. Slow and steady growth should continue to underpin UK dividends, but 2018 will feel sluggish compared to last year, even if it can still eke out a new record of its own.”