UK dividends are unlikely to recover until 2025 at the earliest after a catastrophic year for payouts amid the pandemic.
Eight years of growth wiped off UK dividends last year as companies started to make cuts at the beginning of the second quarter following the outbreak of coronavirus.
Payouts fell 44 per cent to £61.9bn on a headline basis, their lowest annual total since 2011, according to Link Group’s latest dividend monitor. The figure beat the best-case scenario after a stronger fourth quarter in which companies like Sainsbury’s and Ferguson restored payments.
Banking sector takes a hit
UK dividends have taken more of a hit than comparable countries because of their heavy concentration in a few large sectors, including oil and the banking sector.
The financial sector took the biggest hit accounting for two fifths of the cuts between April and December.
This was in large part due to the cancellation of banking dividends following advice from the Prudential Regulation Authority (PRA) stop payouts in the spring and reserve capital for lending.
The banking dividend cuts accounted for four fifths of the £16.6bn worth of dividends cancelled in the financial sector.
Companies dependent on consumer spending unsurprisingly made the biggest percentage cuts after a bruising year. Payouts in the sector fell by three quarters to £5.5bn as retailers and the travel sector saw falls of more than 95 per cent.
Oil dividend cuts accounted for a fifth of all cuts, costing investors £8bn in lost income as oil majors took the opportunity to reset their dividends to more sustainable levels.
Despite these large cuts payouts in the FTSE 100 fell less than than mid and small-caps, falling 53 per cent compared to 63 per cent for the mid-250.
Payouts will take four years to recover
Dividend payouts recovered somewhat in the fourth quarter after some were restored which helped 2020 beat Link’s revised best-case forecast by a tiny amount.
But Link doesn’t expect UK dividends to regain previous highs until 2025 at the very earliest.
“We still believe the worst is past, but a new lockdown means our expectations for for 2021 are significantly more subdued,” Susan Ring, chief executive of Corporate Markets at Link Group said.
This year Link Group expects an 8.1 per cent increase on an underlying basis in the best case scenario which would yield a total of £66bn. In the worst case scenario Link predicts a fall in 2021, dropping 0.6 per cent to £60.7bn.
“The biggest upside will come from the banks. They will only partially restore their dividends, but it matters more how quikly they do so, rather than exactly how much they pay,” Ring said. The oil majors will take several years for the wider market to recover because they have historically paid the highest dividends.
“The social and economic scars of COVID-19 will be deep. We think it is highly unlikely dividends can regain their previous highs until 2025 at the earliest, and potentially even a year or two after that. We’ll keep you posted.”