Underlying dividends, which exclude specials such as large one-off payments, jumped by 27% to £32bn, boosted by the weak pound. Both headline and underlying figures represent the second-largest quarterly total behind the all-time record, which was reached in Q2 2019.
Following an upgrade of its 2022 forecast, Link Group now expects headline dividend growth of 2.4% to £96.3bn. Excluding special dividends, the firm predicts a year-on-year increase of 12.5% to £86.8bn.
A disproportionate three quarters of the year-on-year increase came from the UK’s three biggest dividend-paying sectors – mining, banks and oil.
Most sectors either came in line with, or slightly ahead of, expectations thanks to generally strong profitability, as well as the catch-up effect following dividend interruptions during the pandemic.
Mining dividends contributed to almost a quarter of the headline total. This sits below Link Group’s expectations once the boost from a weaker pound is taken into account. The firm believes that they have quite likely now peaked.
Ian Stokes, managing director, corporate markets for UK and Europe at Link Group, said that if this is the case, mining dividends will act as a brake on UK dividend growth in the next twelve months, despite having provided the main engine over the previous 24 months.
Dividends from oil companies rose 41% in the second quarter, but are still at half of their Q2 2019 peak. Despite quickly growing their payouts this year, dividend growth is slower than energy prices would permit them due to share buyback activity.
The firm expects banks to reclaim its position as the third largest dividend-paying sector this year for the first time since 2019. The two-thirds rise in banking dividends mainly reflects the release of Bank of England restrictions on payouts.
“The weakness of the pound is also proving a key swing factor this year. If it maintains its current level for the rest of the year, sterling is set to have its worst ever year against the dollar. The translated value of dollar dividends is therefore getting a very big boost,” said Stokes.
In Q2, two fifths of the total dividends paid were denominated in US dollars. This generated an exchange rate boost of £1.4bn to their sterling value. For the full year, the pound’s weakness over the dollar is expected to sum an additional £3.5bn to £4.5bn to the total.
“As we move into 2023, headwinds will strengthen. The easy post-pandemic catch-up effects are soon to wash entirely out of the figures, and an economic recession will crimp the ability and willingness of many companies to grow dividends,” he added.