Despite the looming fear of recession, the dividends paid by UK companies have risen by over 20% in the last twelve months.
Just over a year ago, Maynard Paton warned us that Tracker Dividends Have Gone Flat. After two years of rapidly increasing dividend payments from UK companies, the year to July 2007 saw dividend growth of just 1%.
With all the economic troubles over the last twelve months, you might have expected dividends over the last year to perform similarly or perhaps even fall. However, not only has the pattern of dividend growth resumed, we saw the largest increase in payouts for at least a decade.
The table below tracks the dividend growth of UK plc by looking at the FTSE All-Share index. This contains around 650 companies and represents about 98% of the UK market by value. As in previous years, we multiply the level of the index by its dividend yield to get a ‘dividend points’ total.
Date | FTSE
All-Share | All-Share yield (%) | Dividend points | Change (%) |
|---|
13-Jul-98 | 2,798 | 2.36 | 66 | n/a |
13-Jul-99 | 3,012 | 2.21 | 67 | 1.5% |
13-Jul-00 | 3,099 | 2.11 | 65 | -3.0% |
13-Jul-01 | 2,674 | 2.47 | 66 | 1.5% |
13-Jul-02 | 2,059 | 3.29 | 68 | 3.0% |
13-Jul-03 | 1,992 | 3.40 | 68 | 0.0% |
13-Jul-04 | 2,175 | 3.24 | 70 | 2.9% |
13-Jul-05 | 2,625 | 3.03 | 80 | 14.3% |
13-Jul-06 | 2,928 | 3.16 | 93 | 16.3% |
13-Jul-07 | 3,468 | 2.70 | 94 | 1.1% |
13-Jul-08 | 2,661 | 4.38 | 117 | 24.0% |
I’ve used the 13 July figure to preserve the sequence of data. The increase of 24% for the last year is quite remarkable although those of a bearish persuasion will argue that it represents a strong element of denial in many boardrooms and directors should have been preserving capital rather than dishing it out to their shareholders.
The yield on the All-Share index is recalculated whenever dividends are declared, so the figure for July 13 does not include any results announced for the six-month period ended 30 June, which was the first time many companies had to deal with the recent slowdown. The latest All-Share data for August 15 does include many of these results however, particularly for the largest companies that dominate the index and therefore the overall figures for dividends.
So how does the latest dividend picture look? The yield data for August 15 shows that dividend points have slipped to 115 over the past month – a fall of 1.6%. Part of the reason for this latest decrease will be that Royal Bank of Scotland (LSE: RBS) and HBOS (LSE: HBOS) both decided that they will pay their latest dividends in shares rather than cash. Under the rules of the index, neither of these payments is included in the figure for dividend yield.
Will dividends fall over the next year?
I think it’s likely that dividends will continue to fall for the remainder of the year to July 2009. But I’m not expecting the decrease to be that significant and I reckon it will be turn out to be less than 10%. This would mean that dividend payouts will still be quite a bit higher than when the credit crunch began in July 2007. It will certainly be interesting to see how events actually unfold!
The dividend cover ratio for the UK market, which measures how many times dividends are covered by profits, is just over two times. This is relatively low but suggests that most companies shouldn’t have too much paying the same level of dividends as long as their profits remain relatively stable.
Large dividend falls in absolute terms are actually very rare in UK corporate history. This is because companies prefer to increase dividends steadily year by year rather than chopping and changing their payouts depending on what has happened to their annual profits.
Over the last 100 years, dividends fell by a third during the early 1930s during the Great Depression and by about 10% during the Second World War. They also fell by 14% in 1998 when Gordon Brown decided to remove the tax relief on dividends given to pension funds. They have fallen in a few other years, but not by a significant amount.
It would be naive to think that UK dividends are recession proof but certainly, based on the evidence to date, they are holding up extremely well and underpin the case for decent long-term stock market returns from this point forward. Certainly, I would be surprised if the next ten years didn’t improve upon on the last decade which saw zero capital growth and the entire return from the stock market come from dividends. Fingers crossed anyway!
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