UK investors facing dividend drop-off as inflation squeezes profits
Investors in UK firms are facing a drop-off in dividends this year as rising costs cause firms to rein in their payouts following a bumper 2022, according to new data.
Dividend payments last year jumped eight per cent on a headline basis to £94.3bn despite a major slowdown in frothy one-off special dividends that surged during the pandemic, according to the latest UK dividend monitor from Link Group.
Banking dividends accounted for nearly a quarter of the underlying increase during the year as lenders raked in bumper profits on the back of rising interest rates. Booming energy prices also pushed oil payouts a fifth higher, despite firms rolling out major share buybacks presenting an alternative route for surplus capital to reach shareholders.
Bosses at Link said that shareholders would now suffer a slowdown this year, however, as the “economic skies” darken and costs for most firms surge.
“Company margins in most sectors are already under pressure from higher inflation and squeezed household budgets,” said Ian Stokes, managing director of corporate markets UK & Europe at Link.
“Soaring interest rates are now crimping profits by raising debt-service costs too. This will leave less money for dividends and share buybacks in many sectors.”
Stokes said there was some cause for optimism though, with underlying dividends, excluding special dividends, expected to nudge upwards.
“Even with lower mining payouts, there is good growth coming through from the banks and oil producers and across the wider market, cuts made during the pandemic mean payout ratios are conservative on the whole,” he added.
Mining firms have been at the forefront of a dividend frenzy in the past two years as surging commodity prices pushed up profits and sparked a wave of payouts. Mining firms Rio Tinto and Glencore were offering a potential yield north of 10 per cent last year, according to analysts at investment platform AJ Bell.
Link said the sector had reached an inflexion point, however, despite being the largest dividend-paying sector for the second year running, as payouts began to slow by the end of last year.
“By the second half of 2022 lower prices for a number of major commodities had begun to have an impact on dividends, pushing them down by a fifth on a headline basis,” Link said.
The mining slowdown came amid a wider slump in the final quarter of the year as payouts dipped five per cent to £12.4bn on a headline basis, impacted by much lower special dividends and a stronger end to the year from the pound.