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Investors strike gold as 2017 dividends get set to smash record

  • Dividends reach £28.5bn at headline level in Q3 2017, up 14.3% year on year – the largest third quarter on record
  • Special dividends rose by two-fifths to £1.5bn, as Compass distributes an additional £960m
  • At underlying level, dividends (excluding specials) rose 13.2%, in spite of currency gains fading away
  • Mining companies accounted for two-thirds of the total increase, as cash flow in sector surged higher
  • Equities are the most attractive of the major asset classes for income; the prospective equity yield over the next twelve months stands at 3.7%
  • We have upgraded its 2017 forecast for UK plc headline dividends by more than £3bn, to new record £94.0bn, up 11.1% year-on-year.
  • Underlying dividends also to reach new record, rising to £87.3bn, also a climb of 11.1%
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Download the full Dividend Monitor report here

UK dividends soared 14.3% to £28.5bn in the third quarter, according to the latest Dividend Monitor. This was a record payout for the third quarter, and the third-largest quarterly total ever paid. 2017 dividends are comfortably on track to smash the previous annual record set in 2014. The larger-than-expected haul in Q3 built on the dramatic growth in the first half of the year, though it was much less dependent on one-off exchange-rate effects.

With the anniversary of the pound’s devaluation following the Brexit vote having passed in June, the Q3 exchange rate against the dollar was very similar year-on-year. One-third of Q3 dividends is paid in dollars, so these were translated into sterling without the huge foreign exchange gains of the previous four quarters. The effect was a near-negligible 0.2% in Q3.

Special dividends contributed to the rapid headline growth rate. They were two-fifths higher year-on-year, thanks largely to contract caterer Compass, which distributed £960m on top of its regular dividend.

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Underlying dividends, which exclude specials, reached £27.0bn, a Q3 record, and the second largest underlying payout for any quarter ever. The total was 13.2% higher year-on-year, a touch slower than the first half, but crucially dispensing with the supercharge of a weakening pound. In fact, on a constant-currency basis, growth of 12.9% marked a significant acceleration in Q3 and was faster than in any quarter since 2012.

Over two-thirds of the £3.6bn year-on-year increase came from the mining sector. After a prolonged period in the doldrums, commodity prices began to rebound a year ago, driving mining profits higher, as rising revenues met stream-lined cost bases. Dividends have now followed suit, quadrupling in the third quarter to £3.3bn.

Mining aside, performance from UK plc was broadly positive at sector level. 12 sectors out of 17 paid more in the third quarter than a year ago. In industrial goods and support services, there was good news from Rolls Royce, which restored its payout, while BT’s payout pushed telecoms higher. In the banking sector, Lloyds continued to provide almost all the growth. Retail was a mixed bag: Sainsbury’s cut its payout on a poor profit performance, and Marks & Spencer did not repeat its special dividend of last year, while clothing retailer Next paid the second in series of four specials, designed to return surplus cash to shareholders, inspiring confidence in the company's financial position against a more difficult consumer spending backdrop. Food wholesaler Booker, currently the subject of a takeover bid by Tesco, also paid a hefty special. Elsewhere, dividends from the oil, pharma, and utilities sectors were broadly flat year-on-year.

Shares remain the most attractive income generators among the major asset classes. The prospective equity yield over the next twelve months was unchanged at 3.7% excluding the effect of any special dividends that may get paid in the future. The top 100 will yield a touch over 3.8% (unchanged), while the mid-caps saw their collective yield rise slightly to 2.7%.

With billions more being paid by the mining sector than investors expected, and a surprisingly large haul of special dividends, we are upgrading its forecast again, and by over £3bn. It now expects 2017 headline dividends of £94.0bn, an increase of 11.1% year-on-year, and easily a record for UK plc. Underlying dividends (excluding specials) will reach £87.3bn, also up 11.1%, equally breaking a new record. On a constant-currency basis, underlying growth will be 8.5%.

Investors have struck gold as this year’s haul easily smashes the previous record set in 2014. Generous payouts have been topped up by big exchange rate gains between January and June and very large special dividends, setting 2017 up to be a sparkling year. Justin Cooper
CHIEF EXECUTIVE OF SHAREHOLDER SOLUTIONS

Justin Cooper, Chief Executive of Link Market Services, part of Link Asset Services said: “We had high hopes for 2017, but the dividend seam is proving even richer than we expected, as the mining sector finds its footing again. Investors have struck gold as this year’s haul easily smashes the previous record set in 2014. Generous payouts have been topped up by big exchange rate gains between January and June and very large special dividends, setting 2017 up to be a sparkling year. The lustre will dim markedly in the fourth quarter, however, as the potential for further upside surprise has diminished.”

“Exchange rate gains will be gone in 2018, unless the pound takes another jolt downwards as the Brexit talks unfold, and most of the big companies who cancelled dividends in recent years have already restarted them, so that additional sparkle will have dulled. Even so, the overall value distributed by UK plc is likely to remain at or near 2017’s record levels.”

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With grateful thanks to Exchange Data International for providing the raw data

This material is for general information only and is not intended to provide specific advice.