Royal London Asset Management’s Senior Fund Manager Richard Marwood explains how UK dividend payments have bounced back over the course of the year.
After a miserable 2020 where dividends declined by 44% to £61.9bn, the lowest annual total since 2011, pay-outs have bounced back strongly. Many companies have reinstated and increased their dividend distributions or paid special dividends. This recovery is reflected in the performance of the IA UK Equity Income sector, which has comfortably outperformed the FTSE All Share Index over the 12 months to end of September. That is supported by strong cashflows in the mining sector, with Rio Tinto and Anglo American both making huge payments to shareholders amid bumper profits.
For 2021 as a whole, the market expects dividends per share in the FTSE All Share Index to be 35% higher than in 2020 but 15% lower than in 2019. They are then expected to be broadly flat, with a very gradual recovery through to 2023. This muted dividend growth reflects the fact that the average pay-out ratio is expected to be materially lower in 2023 than it was in 2019. That, in turn, reflects some continued uncertainties around the trajectory of the economic recovery. Additionally, the likes of Royal Dutch Shell and BP have fundamentally rebased their dividends, and GlaxoSmithKline will follow their lead when it demerges its Consumer Healthcare business in mid-2022. The bumper special dividends from the mining companies that we have seen this year are also not expected to persist over the coming years.
The good news is that these expected dividend policies should be much more sustainable in future. Not only are the pay-out ratios less demanding, but companies are benefitting from higher free cashflows and profitability, alongside stronger balance sheets as rewards for cost cutting and streamlining during the pandemic. The average EBITDA margin is expected to be some 3.5% higher in 2023 than it was in 2019, and consequently the net debt to EBITDA ratio is forecast to drop from 1.71 to 1.23 over that same period, providing good support for the forecast 3.8% index yield. It is also worth noting that the dividend cuts from a small number of major index constituents mask the fact that the underlying dividend growth for the broader market looks very healthy.
More broadly, we believe that the UK market remains an interesting place to invest. It has many strong companies and a good mix of sector exposures. Furthermore, it is attractively priced relative to other markets and offers a good dividend yield. There are good reasons why the UK may have struggled to keep pace with other markets, not least of which are the uncertainties of Brexit and the lower weighting the UK market now has in global indices. Additionally, the UK market was arguably less well placed for the 2020 lockdowns, having a lower exposure to technology stocks and a greater exposure to sectors reliant on mobility and physical activity (e.g. oil and leisure) but as the world now hopefully normalises, that allows greater prospects for recovery. As valuations languished, the attraction of UK companies was well illustrated in 2021 by the number that found themselves on the receiving end of takeover bids from either private equity firms or industrial buyers. It would be unsurprising if we continued to see takeover activity into 2022.