UK dividends forecast to shrink in 2023

UK shareholders are braced for a fall in dividends this year as the global economy shrinks and a period of large one-off payments comes to an end.

Dividend payouts are expected to decline 2.8 per cent to £91.7bn as the volume of special dividends falls to a “typical year’s average”, according to fund administrators Link Group. However, underlying dividends are predicted to increase by 1.7 per cent to £86.2bn.

Link’s estimates followed a strong year in 2022 for UK investors, in which dividends were up 8 per cent on 2021 at £94.3bn. One-off payouts in areas such as banking and commodities masked wider market discomfort, with the FTSE 250 index of mid-cap companies falling 19.7 per cent in 2022.

“Company margins in most sectors are already under pressure from higher inflation and squeezed household budgets,” said Ian Stokes, managing director of Link Group. “This will leave less money for dividends and share buybacks in many sectors.”

Investors reaped better than expected payouts in 2022 following a difficult period during the pandemic, while an economic slowdown over the next 12 months means dividends are unlikely to return to peak levels soon.

The UK was hard hit by a dividend drought in 2020, with payouts declining by one-fifth worldwide as companies dealt with the fallout from Covid-19 and the subsequent economic slowdown.

Link published a report two years ago forecasting that dividend payments would not fully recover from the pandemic until as late as 2025. Analysts said this was now less likely, with payouts having to rise 6 per cent in 2024 and 2025 to reach pre-pandemic levels.

In 2021, asset manager Janus Henderson said companies were taking the opportunity to reset payments, with the dividend yield on UK shares nearly double the 2 per cent global average. Link estimates yields will be around 3.7 per cent this year, with the gap to gilt yields the narrowest in over a decade.

Recovery in the pound following a dip last year could act as a break on dividend growth in dollar payments. Companies returned £3.8bn more to UK investors in 2022 as sterling fell against the dollar and euro, boosting headline growth by 4 percentage points.

Banks accounted for one-quarter of the increase in dividends seen last year, while surging energy prices led to a 20 per cent rise in payouts made by oil companies. The latter also undertook significant buyback programmes, with Shell repurchasing £16bn of its own shares.

The volume of buybacks doubled in 2022, denting dividend performance slightly, as companies purchased shares equivalent to more than 2 per cent of UK market capitalisation. Shell’s buyback programme accounted for almost one-third of all share buybacks for UK plc in 2022.

Listed insurance providers returned 66 per cent more to investors last year, though a cold weather snap in December has already caused bosses at FTSE 250 insurer Direct Line to axe dividends as it reported a £90mn hit on earnings due to increased claims.

Mining companies paid out record sums in the first half of 2022, accounting for £1 in every £6 distributed to investors. They experienced a slowdown towards the end of the year as the price of major commodities started to decline.

Stokes added: “Even with lower mining payouts, there is good growth coming through from the banks and oil producers . . . UK plc enters the recession with profits at a comfortable level compared to dividends and this will provide support.”