Dividend picture brightens

If you hold funds designed to provide income from UK shares, you probably do not need reminding that 2020 was a grim year on the dividend front. Indeed, by the final quarter of the year, the IA’s worst sector in terms of net retail sales was UK Equity Income.

What happened?

In a word, the pandemic. In 2019, the total amount of UK dividends paid out rose by 10.8% over the previous year, helped by some large special (one-off) dividends. 2020 started off looking as if dividends would grow more slowly, but nobody foresaw the drop that happened.

The pandemic was especially bad news for two sectors which account for a significant slice of dividend payments: banking and oil. In March 2020, the Bank of England told the major banks that it regulates to stop dividend payments immediately in order to preserve cash. That act alone accounted for 30% of the £44.8bn drop in dividend payments for the 12 months ending on 31 March 2021 – the year of Covid-19 – according to Link Group, one of the UK’s leading share registrars.

The oil companies were under a different cosh; a collapse in both oil prices and in demand. For some while there had been speculation that the UK’s two oil majors, BP and Shell, would have to cut their dividends, but the pandemic gave them a green light to make much larger cuts than anticipated. Shell’s quarterly dividend dropped by almost two thirds, while BP’s halved. The oil sector accounted for a quarter of that £44.8bn dividend decline. 

Across the pandemic year, two thirds of all UK listed companies either cut or stopped dividends. Probably not all the cuts can be blamed on the pandemic. For some companies that had been paying out too much of their profits to shareholders, Covid-19 offered useful justification for surrendering to the inevitable. Others took a super-cautious approach and suspended dividend payments until the picture was clearer.

The UK saw one of the biggest global drops in dividends in 2020, partly because of the types of company it is home to. The European market suffered about three quarters of the UK fall, while North America managed a small increase – a reminder of the benefits of international diversification.

The view ahead

With the roll out of vaccines now well underway, the uncertainties facing UK businesses are much reduced, although they have not disappeared. The Bank of England has given the banks permission to resume dividend payments, but at lower than pre-pandemic levels. All have taken the opportunity. Shell has even started to modestly increase its dividend.

In the first quarter of 2021, total dividend payments were higher than the corresponding quarter of 2020. However, this rosy picture is a distortion created by the unusually large value of special dividends paid in the first three months, £5bn of which came from Tesco alone following the sale of its Asian business. Underlying dividends (i.e. excluding the specials) were down 26.7% year on year, an improvement over the 39.0% drop of the previous quarter. 

For the second quarter of 2021, the underlying dividend comparison should change dramatically, if only because the year ago figure will be the quarter in which the pandemic had most impact. In the latest edition of its quarterly dividend monitor, Link Group says that “Companies are increasingly declaring dividends roughly in line with our best-case scenario for the year’. Its best-case forecast for 2021 is that underlying dividends will increase by 5.6%, while best-case total dividends is a rise by 17.2%, again chiefly due to Tesco’s Q1 bumper payout. 

Past performance is not a reliable guide to the future. The value of investments and the income from them can go down as well as up. The value of tax reliefs depend upon individual circumstances and tax rules may change. The FSA does not regulate tax advice. This newsletter is provided strictly for general consideration only and is based on our understanding of law and HM Revenue & Customs practice as at January 2011 and the contents of the 2010 Comprehensive Spending Review.  No action must be taken or refrained from based on its contents alone.  Accordingly, no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction. 

Professional advice is necessary for every case; we would love to hear from you…

May 2021