Soaring bank dividends drive upgrade to UK payouts for 2023, says latest Dividend Monitor

UK dividends are set to rise more quickly than expected as a result of a dramatic recovery in banking payouts, according to the latest quarterly Dividend Monitor, published by global financial services company Computershare.

UK dividends fell 9.0% in total on a headline basis to £32.8bn in the second quarter, which mainly reflected sharply lower one-off special dividends.

The underlying picture was much more encouraging than the headline figures suggested: regular dividends totalled £32.2bn: up 3.5% on an underlying basis and ahead of Computershare’s Dividend Monitor forecast.

Banks have been reporting very strong profits and were comfortably Q2’s biggest engine of UK payout growth: paying £7.8bn, which was up 61% on an underlying basis.

Britain’s biggest bank, HSBC, has signalled that it has capacity for significant further dividends and share buybacks – and is on track to become the UK’s largest dividend payer this year for the first time since 2008.

Banks are expected to make the most significant contribution to dividend growth for the full year in 2023.

Across other sectors in Q2, the diverse ‘industrial goods and support’ sector delivered 12% underlying growth, ahead of forecast, with 95% of industrials delivering year‑on‑year increases.

Meanwhile dividends from the airline, leisure and travel sector have been the slowest to make a recovery from the pandemic: payouts rose by two thirds but are still well below pre‑lockdown levels.

The biggest negative impact came from sharply lower mining dividends, which fell by a third (in line with Dividend Monitor forecasts) as lower commodity prices impacted cash flows in the sector.

The strong underlying second-quarter figures, along with the promise of significant further banking dividends to come, have driven an upgrade in Computershare’s Dividend Monitor forecast for 2023.

The headline total is expected to fall 1.7% to £92.3bn (reflecting lower one-offs and exchange-rate headwinds), but this is nevertheless a £1.0bn improvement on the prospects three months ago.

Regular dividends are now expected to rise to £88.9bn, up 6.1% on underlying basis, an upgrade of £2.7bn compared to three months ago.

Mark Cleland, CEO Issuer Services United Kingdom, Channel Islands, Ireland and Africa at Computershare, said: “UK companies collectively made record profits last year and have so far proved resilient in the face of interest rates, similar to their international peers, which has provided significant support for dividends and share buybacks.

“Among the three biggest-paying sectors banking and oil dividends are firing on all cylinders, compensating for much lower mining dividends, though even these remain high by historic standards.

“Forecasts for company earnings are coming down due to the darkening UK economic picture and a belief that policymakers are prepared to risk a recession to combat inflation.

“However, the dividend outlook has brightened in the short term.

“Banking profits are soaring as they benefit from higher interest rates, and dividends are following suit.

“Outside the banking sector, companies with pricing power are building margins, contributing to inflation but in turn boosting their dividend fire power, and there are still small pockets where dividends are still catching up after cuts made during the pandemic, which is boosting the total paid.”

The Dividend Monitor also reports that:

  • The top 100 payouts outpaced the mid-caps for the first time since Q2 2021 (driven by large banks and industrials), as the recovery from the pandemic had initially favoured the smaller companies that had been compelled to cut their dividends more steeply during lockdowns to preserve cash.
  • Underlying growth among the top 100 was 5.8% in Q2, though the headline figure fell due to lower one-off special dividends.
  • Mid-cap dividends rose 3.0% on an underlying basis.
  • Falling share prices combined with improved expectations for dividends meant the prospective yield on UK equities improved in the quarter, rising from 3.7% to 4.0%.
  • Nevertheless, other asset classes saw yields rise much more dramatically.
  • The UK 10-year benchmark gilt yield soared 1.2 percentage points to almost 4.7%.
  • Best-buy instant access savings accounts now offer 4.4%, up from 3.6% in April.

Mark Cleland added: “With UK government bond yields back at levels last seen 15 years ago and cash savings rates inching up in tandem, this big shift in the income landscape means equities now yield less than cash savings or bonds.

“It is important to remember, however, that dividends tend to grow over time, whereas bond coupons and cash interest do not, helping to tip the scales back in favour of equities as a long‑term investment, although they come with higher risks attached.”