Analysis: UK dividends register first quarterly gain since 2009

Dividends in the third quarter of this year saw their first quarterly increase since the start of 2009, according to the Capita Registrars Dividend Monitor. Dividends grew by 1.6% year-on-year to £17.6 billion.

As a result, Capita Registrars has upped its forecast for this year to £55.7 billion, an increase of £1 billion. Yet overall distribution to shareholders is still 5% lower than last year and 13% lower than the 2008 peak.

The British equity income sector has struggled over the summer, following the Gulf of Mexico oil spill which caused BP to scrap dividends to compensate for the consequences.

At the time, BP cancelled dividend payments just two days before it was due. Many fund managers had bought shares just in time to claim dividend but then faced a dilemma of owning shares that did not deliver.

Once the biggest dividend payer in Britain, BP would have paid out over 9% of dividends in the third quarter of this year. Bob Dudley, the new chief executive officer at BP, has indicated that dividends are about to be declared again for payments in March next year.

Yet Capita Registrars warns there is still “one more quarter of pain” to go through and BP leaves a “deep scar” in the British equity income sector. And even though dividends returned to growth, it was the cancellation of BP’s dividend that had the biggest effect on the total paid. (article continues below)

Adjusting for the BP effect, total dividends have risen by 13% since the first quarter of 2008. However, Capita Registrars says this pace of growth may not be repeated in the final quarter of this year. This quarter’s boost in dividend payments was mainly down to effects of some of the one-offs from earlier this year.

With BP making a full year’s dividend payment, and broad expansion elsewhere, Capita Registrars says dividends in 2011 look likely to top 2010.

The British equity income sector continues to be dominated by a few dividend payers. Although they have swapped places on the list of top 10 payers over the couple of years, the problem is essentially the same.

The top five stocks – Vodafone, HSBC, National Grid, Royal Dutch Shell and GlaxoSmithKline – paid out 41%, or £7.1 billion, over the third quarter of this year. Last year, the top five were especially dominant because of the dramatic reductions in payments from elsewhere across the stockmarket.

With a pay out of £3 billion this quarter, up 9% on the final dividend paid last year, Vodafone paid one fifth of all dividends in the third quarter. This makes the phone giant the single largest dividend payer for more than four years.

This concentration bears risks for equity income funds managers, who are forced to rely on a handful of dividend payers. “The huge dominance of the top few companies means even a small percentage change in the cash amount they pay can swamp a widespread trend among hundreds of smaller firms,” the report says.

“Even if the economic recovery slows, we would expect payouts to continue to grow”

In total 200 companies paid dividends over the third quarter, in-line with last year’s numbers. More interestingly perhaps, the number of companies that increased, started or reinstated payments outnumbered those that cut or cancelled. Capita Registrars says this is a strong indicator of growing corporate strength.

At a sector level, 26 out of 40 sectors increased their dividends. Of these, 17 were cyclical sectors. These industries typically suffer most in a recession as demand for their goods and services is highly dependent on the economy as a whole.

Joe Wiggins, an investment manager at Principal Investment Management, expects the recovery to boost British equity income funds. So far, Wiggins says, those funds that are invested in cyclical companies have benefited. Small and mid caps as well as those that focus on resources have done particularly well recently.

Principal Investment Management monitors the British equity income sector to create its White List, which ranks funds on a key set of criteria. Those include, for example, the income generated, consistent total returns and volatility.

Wiggins expects the Henderson UK Equity Income fund, the Axa Framlington UK Equity Income fund and the Unicorn UK Income fund to benefit from the recovery of small and mid caps. The CF Walker Crips Equity Income fund with its long-running theme of resources, on the other hand, is likely to benefit from the recovery in the resources sector.

“Even if the economic recovery slows, we would expect payouts to continue to grow,” the report says. “However, if we sink into recession again in the next three to six months, dividends will show the effects a short while later.”