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UK dividend payouts rise sharply, but slowdown looms

Kit Klarenberg
Written By:
Kit Klarenberg

Dividend payouts by UK corporates have hit a new third quarter record, but the outlook is “less rosy” with the risks of more cuts from commodity firms, a new report warns.

The latest Capita Asset Services UK Dividend Monitor report found that headline dividends totaled £27.2bn for the July to September period, a year-on-year increase of 6.8 per cent and the highest third quarter payout on record.

With the the pound 8 per cent lower than the dollar in the third quarter year-on-year, investors enjoyed a £600m windfall, as many of the UK’s largest companies declare dividends in US dollars.

Financials drove the growth of UK dividends, with payouts strong across the whole sector. A generous interim dividend from Lloyds Bank was a particular highlight, the second payment it has made this year, after a crisis-driven six year hiatus.

However, the report warned that “the outlook for dividends is less rosy” with further cuts expected in the struggling commodity space.

Troubled mining giant Glencore has already announcing 2016 dividends will be cancelled, saving the company £1.5bn in a bid to shore up a shaky balance sheet.

Supermarket price wars are also costing shareholders dearly. Tesco’s dividend cancellation, plus the cut from Sainsbury’s, reduced the third quarter total by £1bn.

Justin Cooper, chief executive of shareholder solutions at Capita Asset Services, said: “Income investors have had terrific dividend payouts in 2015 so far, shrugging off some high profile casualties like Tesco. But the outlook is gloomier. Profits are lower relative to dividends than at any time since 2009, and we have seen some of Britain’s biggest dividend payers announce drastic cuts for the year to come, with the prospect of more to follow.

“Companies tend only to cut their dividend in extreme circumstances, either if their profitability is permanently lower, or balance sheets are under pressure, so we still expect growth overall next year. The top 100 in particular is struggling to make any headway. Income investors can take comfort in the fact equities continue to offer a very attractive yield compared to other asset classes, but with risks abounding, they should ensure they keep their portfolios well diversified.”

Mid-caps continued to demonstrate dramatically faster growth compared to the top 100, as they are more insulated from negative global trends, and are more exposed to rapid economic improvement in the UK. Dividends climbed 30.8 per cent to £2.9bn at the headline level. By contrast, the top 100 only grew 4.1 per cent year on year. Top 100 dividend growth has lagged behind the mid-caps in nine out of the last ten quarters.

Capita’s overall dividend payment total forecast for 2015 is unchanged at £87.2bn. The firm said underlying dividends (excluding special payouts) will now reach £84.6bn, £200m less than previously forecast, mainly because Standard Chartered has halved its interim dividend, which it would have paid this week.

Capita’s revised forecast represents a 6.8 per cent year on year rise, the fastest increase since 2012, and a new record for the underlying total.

Click here for more on where investors should look in the hunt for income.