Investors received a mammoth payout last year from British companies, which disbursed nearly £100 bn ($130 bn) in dividends – a new record.
According to Link Asset Services’ UK Dividend Monitor, which measures how much British companies pay out in dividends, payments were up 5.1 percent to £99.8 bn in 2018. The record payout was driven by a rise in profits, better-than-expected special dividend payments and the effect of currency exchange rates.
Companies with international operations benefited from a decline in the pound as earnings in foreign currencies including the US dollar were boosted when translated into sterling. Around £2 in every £5 of UK dividends are paid in dollars, so the pound/dollar exchange rate can have a significant impact on amounts paid in sterling.
British American Tobacco made the largest contribution after it paid £900 mn to shareholders. But it was the mining sector that benefited from the largest rise in dividends, jumping a whopping 66 percent to £11 bn.
Banks also increased dividends, with Royal Bank of Scotland announcing its first dividend since its government bailout in 2008: £240 mn, £150 mn of which was taken by the UK’s Treasury department as the UK taxpayer remains RBS’ largest shareholder at 62.3 percent. Standard Chartered resumed income payments to shareholders after a three-year gap and Lloyds Banking Group’s shares finally managed to pay out more than they had done before the financial crisis.
The overall rise in dividends came despite falling share prices in 2018, with the FTSE 100 suffering its worst year since the 2008 financial crisis, falling 12.5 percent.
Investors are likely to see another dividend increase this year, but not at the same level as 2018, with Link Asset Services forecasting a 4.2 percent rise.
Justin Cooper, chief executive of Link Market Services, which is part of Link Asset Services, says in a statement: ‘[Last year] was a terrific year for dividends but a terrible one for share prices. Dividends are less volatile than profits, as companies tend to smooth the cycle, but they can still be expected to fall if the economy shrinks.’
The yield on UK shares could well be a cause for concern: it is expected to hit 5 percent for the top 100 companies and 3.3 percent for mid-caps, with an average of 4.8 percent. Over the last 30 years, the average yield has been 3.5 percent, Link Asset Services notes.
‘A very high yield is often a sign of trouble ahead, as investors know company earnings evaporate very quickly when the economy turns down,’ Cooper observes.
