Dividends for UK shareholders are likely to go down because the global economy is shrinking, and a period of big one-time payments is ending this year. Fund administrators Link Group say that the number of special dividends will drop to a “typical year’s average,” which will cause dividend payouts to drop by 2.8% to £91.7bn. On the other hand, underlying dividends are expected to go up by 1.7% to £86.2bn.
Link’s estimates came after a good year for UK investors in 2022 when dividends were up 8% from 2021 to a total of £94.3bn. In 2022, the FTSE 250 index of mid-cap companies fell 19.7%. This was due to one-time payouts in areas such as banking and commodities, which hid a wider market problem.
Ian Stokes, managing director of Link Group, said, “Higher inflation and tighter household budgets are already putting pressure on company margins in most sectors; there will be less money for dividends and buying back shares.”
After a hard time during the pandemic, investors got better-than-expected dividends in 2022, but the economy will slow down over the next year. Hence, dividends aren’t likely to return to peak levels anytime soon. In 2020, the UK was hit hard by a dividend drought. Payouts fell by one-fifth worldwide as companies dealt with the effects of COVID-19 and the subsequent economic slowdown.
Link published a report two years ago that said dividend payments would not fully recover from the pandemic until as late as 2025. Analysts said this was now less likely, and payouts would have to go up by 6% in 2024 and 2025 to get back to where they were before the pandemic. In 2021, asset manager Janus Henderson said that companies were resetting payments, and the dividend yield on UK shares was almost double the global average of 2%. Link thinks that yields will be around 3.7% this year, which is the closest they’ve been to gilt yields in over a decade.
After falling last year, the pound could recover, which could slow the growth of dividend payments in dollars. As the pound’s value fell against the dollar and the euro in 2022, companies gave back £3.8 billion more to UK investors. This increased growth by four percentage points. One-quarter of the rise in dividends last year came from banks while rising energy prices caused oil companies to raise their payouts by 20%. Both companies did a lot of buybacks, with Shell buying back £16 billion worth of its shares.
In 2022, the number of buybacks doubled, which hurt dividend performance a little. Companies bought shares worth more than 2% of the market capitalization of the UK. In 2022, almost one-third of all share buybacks in UK plc was part of Shell’s buyback program. Last year, listed insurance companies gave back 66% more to investors than they did the year before. However, a cold spell in December caused FTSE 250 insurer Direct Line to cut dividends because it had to pay out more claims, which hurt its earnings by £90 million.
In the first half of 2022, mining companies paid out record amounts, which made up £1 of every £6 given to investors. At the end of the year, their business slowed down because the prices of major commodities started to go down. Stokes also said, “Even though mining payouts are lower, banks and oil producers are doing well.”
