Leading global share registry and financial services provider Link Group has predicted that UK company dividends are unlikely to return to pre-Covid levels until 2025, after payouts almost halved in 2020 – writes Christian Leeming.

 

2020 was the first time since 2015 that distributions have not grown year-on-year; dividends from UK plc fell by 44% to £61.9bn for 2020, the lowest since 2011.

Two-thirds of all UK listed firms either cancelled or cut their dividends in the nine months between lockdown and the end of the year; however a quarter of companies managed to increase their dividends, with one tenth maintaining theirs.

Link produced a range of possible scenarios for the year ahead; its gloomiest suggests dividends could fall by 0.6% to £60.7bn which would be the first time dividends had fallen for a second year running since it began monitoring.

However, the firm’s best-case scenario says that dividends could grow by 8.1% on an underlying basis to £66bn; Link’s CEO for corporate markets Susan Ring said 2020’s distributions had been ‘a dreadful result for UK investors, especially those for whom dividends are a major source of income’.

She noted that the structure of the UK stockmarket whereby the majority of payouts come from a small number of oil, mining and banking giants meant it had been hit harder than most comparable countries in terms of dividends.

Banks saw the largest cuts to dividends in 2020 at £16.6bn; oil majors followed at £8bn and miners fell by two-fifths.

Despite predicting dividends would not return to their pre-Covid heights until ‘at least’ 2025, or possibly one or two years after that, Ms Ring said there were ‘reasons for optimism’, despite the inevitable economic hit that will come from a third lockdown will bring: ‘We still believe the worst is past, but a new lockdown means our expectations for 2021 are significantly more subdued,’ she said.

‘The biggest upside will come from the banks. They will only partially restore their dividends, but it matters more how quickly they do so, rather than exactly how much they pay. By contrast, the £11bn reduction in oil dividends by March will take several years for the wider market to make up.’

Fund managers have been more optimistic, with Simon Young, manager of the AXA Framlington UK Equity Income fund, predicting dividend growth for 2021 of between 5% and 10%, despite headwinds remaining, particularly in the form of uncertainty over when banks will be allowed to resume payments.

Mr Young told Investment Week: ‘After such a big decline in income levels from UK plc, we have effectively had a big reset for many companies.

‘We expect a vaccine roll out to improve the outlook for economic growth globally and hasten a recovery in earnings and thus dividends in 2021.

‘We are optimistic for the future of UK companies, which in the main have shown a great deal of resilience, pragmatism and often ingenuity in dealing with a fast moving virus that has warranted changing government policy with little or no notice.’

Portfolio manager of Henderson High Income Trust David Smith predicts modest growth in 2021 before seeing more significant growth levels in 2022 and beyond. He told Investment Week: ‘Q4 showed a glimpse of better times ahead with a return of some previously suspended dividends.

‘It is likely that more companies will continue to return to the dividend register in 2021 but at low levels as companies remain cautious until there is a clearer path for cash flows to recover and balance sheets to be repaired.

There will be pockets of strong dividend growth within the market this year for the selective investor. Despite the terrible year for income in 2020, a dividend yield of 3.1% for the UK market is still attractive and this level is likely to be more sustainable going forward with the opportunity to grow from its lowered base.’

Whilst acknowledging that the outlook from Link sounds bleak, Willis Owen’s Adrian Lowcock told Investment Week that this ‘misses the point’ saying: ‘We have long believed that 2020 was a reset for dividends. Dividends had become unwieldy before last year, but now investors should be reassured that going forward, dividends from companies will be more sustainable, while dividend growth could easily surprise if the economic recovery is more robust than expected.’
 





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