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UK dividends set to top GBP100bn in 2014 despite slowdown in growth

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UK dividends are set to break through the GBP100bn mark in 2014, far outstripping the record payout of GBP80.6bn in 2012, according to the latest UK Dividend Monitor from Capita Asset Services.

The GBP16.6bn (gross) special dividend following Vodafone’s disposal of Verizon will bring Capita Asset Services’ forecast to next year to GBP101.8bn, enough comfortably to finance the entire UK budget deficit for the year. The underlying dividend forecast for 2014 is GBP83.0bn.
 
This unprecedented GBP101.8bn headline dividend bonanza masks a marked slowdown in the underlying growth in income being paid by UK firms. The third quarter makes or breaks the annual dividend pot as it is customarily the biggest paying quarter of the year.  This year, however, it failed to top its second quarter rival for the first time since 2008. 
 
In total, UK Plc distributed GBP25.3bn to its investors between July and September, 5.7 per cent higher year on year on a headline basis (which includes special dividends), but GBP60.5m less than the second quarter.  Special dividends made a small contribution, just GBP328m, and this was almost a quarter lower year on year.
 
On an underlying basis, dividend growth slowed to 6.2 per cent, down from 7.7 per cent in the first half.
 
The slowdown in underlying dividend growth in the third quarter means the headline total for the year is now likely to fall below the 2012 level, the first decline in headline dividends since 2010. Capita Asset Services’ revised forecast for total headline dividends is for a fall of 1.2 per cent this year to GBP79.7bn, GBP900m less than last year.  Previously Capita forecast GBP81.4bn for 2013. 
 
Capita expects underlying dividends for 2013 to hit GBP77.5bn, up 7.0 per cent for the year on a like for like basis, with the second half growing more slowly than the first.  Its forecast for 2014 is for growth of 6.8 per cent on an underlying basis to GBP83.0bn.
 
At sector level, cyclical and defensive sectors both grew at the same rate, and each contributed half of the total.  Notably the banks are continuing to make a bit of a comeback, led by HSBC. With Lloyds beginning to disentangle itself from state ownership, and Barclays promising bigger dividends to come (a slightly confusing policy after its big rights issue), the banks are gradually returning to the fore.
 
A total of 216 companies paid a dividend in the third quarter, of which 171 increased or started paying, while 28 cut or cancelled them, a very healthy 6.1:1 ratio. For the coming twelve months, the yield on equities is 4.1 per cent, based on Capita’s forecast growth rate for dividends.
 
Justin Cooper, chief executive of shareholder solutions, Capita Asset Services, says: “We have been warning for some time that dividend growth would slow down.  That slowdown has been greater than we expected on an underlying basis, and reflects a very soft patch in company profitability over the last year.  With the economy on the mend, profits should begin to recover over the next twelve months.  And companies are rich with cash – the FTSE 100 has GBP166bn on its collective balance sheet.  This should all mean a pick-up in dividend growth next year on an underlying basis.  
 
“Special dividends are the icing on the cake. This year they are in line with our forecast, and are at relatively normal levels, but next year will very special indeed. In fact, the Vodafone effect is so huge that at a headline level of GBP101.8bn, it is likely to be 2017 before investors see total dividends of this magnitude from UK plc again.  That one payment will affect behaviour across the market, including influencing the timing of new IPOs as companies seek to float shortly after the special dividend payout, when Vodafone cash will be burning a hole in investors’ pockets. Such an injection of cash will provide an added fillip to the already recovering IPO market.”

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