UK dividends beat second quarter expectations in dramatic bounce-back

In the banking sector, HSBC was the biggest contributor, despite being under Prudential Regulation Authority constraints during the period after a ban altogether in 2020. Photo: Kevin Coombs/Reuters
In the banking sector, HSBC was the biggest contributor, despite being under Prudential Regulation Authority constraints during the period after a ban altogether in 2020. Photo: Kevin Coombs/Reuters

UK dividends staged a dramatic recovery in the second quarter of the year, jumping 51.2% on a headline basis to £25.7bn ($35.3bn), new data has shown.

According to the latest UK dividend monitor from Link Group (LNK.AX), dividends beat initial forecasts, with payouts excluding special dividends at £24.3bn, up 43.8%. However, this was still one sixth lower than their pre-crisis average, highlighting the long road to full recovery.

The main driver was companies restarting dividends; around 90% of the year-on-year increase came from firms that had cancelled dividends in Q2 2020 due to the outbreak of COVID-19.

The bounce-back was fastest among mid-cap firms, reflecting the greater decline they suffered last year.

Dividends beat initial forecasts, with payouts excluding special dividends at £24.3bn, up 43.8%. Chart: Link GroupDividends beat initial forecasts, with payouts excluding special dividends at £24.3bn, up 43.8%. Chart: Link Group
Dividends beat initial forecasts, with payouts excluding special dividends at £24.3bn, up 43.8%. Chart: Link Group

Almost every sector saw payouts rise year-on-year, however, the report showed that the three biggest dividend-paying sectors were mining, banking and oil.

Of the £8.7bn recovery in UK plc Q2 dividends year-on-year, the first two of these industries accounted for over two thirds of the increase, but the oil sector acted as a brake on the recovery.

Mining dividends made up a quarter of the second quarter total at £6.3bn, boosted by Rio Tinto (RIO). In the banking sector, HSBC (HSBA.L) was the biggest contributor, despite being under Prudential Regulation Authority (PRA) constraints during the period after a ban altogether in 2020.

The PRA is the organisation within the Bank of England (BoE) responsible for oversight of the sector.

Read more: Banks forced to axe dividends and may cut bonuses over COVID-19 crisis

Elsewhere, BAE Systems (BA.L) was also among a significant number of companies which returned to their usual schedule of paying a second-quarter dividend, having paid late in 2020.

Link Group said the biggest contribution to the upside surprise came from industrials, financials and basic materials, accounting for almost a third each.

It now expects headline dividend growth of 24.4% to a new total of £79.5bn this year, while underlying dividends are set to rise by 13.4% to £71.2bn. This is 3.9 percentage points, or £2.7bn, more than its April forecast.

The Australian-based IT service management firm said “the upside tailwinds will get less favourable from here” but that it expects banking dividends to “rebound now that regulatory limits have been scrapped.”

Read more: FTSE 100 dividends set to fall 20% in 2020

However this will not immediately bounce back to pre-pandemic levels as share buybacks will also feature.

“We have regularly cautioned over the last year that dividend patterns will be very noisy as we move through the recovery phase. This will make for choppy waters in the months ahead, but it does not mean we are pessimistic,” Ian Stokes, managing director, corporate markets UK and Europe, at Link Group said.

“All the indicators of economic growth look very encouraging, and companies have come out of the crisis in most cases with their balance sheets looking strong. Resurgent profits and healthy bank balances mean more dividends for shareholders. These wider trends also help explain why the regulator has lifted the embargo on dividends from capital-rich banks.”

Watch: Dividends and buybacks back on track

By Matt Earle

Matthew Earle is the Founder of MiningFeeds. In 2005, Matt founded MiningNerds.com to provide data and information to the mining investment community. This site was merged with Highgrade Review to form MiningFeeds. Matt has a B.Sc. degree with a minor in geology from the University of Toronto.

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