Divis reach record Q2 high but payout outlook weakens

● Analysts flag UK economic weakness despite a surge in headline figures

dividends soared to an alltime high in the second quarter, but the underlying outlook worsened as growth relied on one-off payouts and a weak pound.

Headline dividends rose by 14.5 per cent to a record £37.8 billion in the three months to June, beating a previous second-quarter high in 2017 by £4.4bn, according to the latest monitor from Link Group.

The report cautioned of underlying weakness in the UK economy, however, as underlying dividends (which exclude specials) rose by a weaker-than-expected 5 per cent to £32.4bn.

Link pointed to a slowdown in the global economy and the “looming” Brexit process as contributing to pressure on profits at British firms.

For the second quarter running, rising dividend totals were driven by “exceptionally large” special payouts and an unsteady British currency.

Link’s research showed that exchange-rate gains made up almost half the increase in total dividends as large-cap companies, which benefit disproportionately from weaker sterling, grew payouts much faster than their mid- and small-cap counterparts.

Huge special dividends from Rio Tinto, Micro Focus International and Royal Bank of Scotland contributed most to the headline increase.

Barclays also paid its largest post-crisis dividend and, with RBS and Standard Chartered, helped make the banking sector one of the top performers.

The FTSE 100 saw payouts jump 18.5 per cent in headline terms and clocked up a record total payout, but the underlying rise lagged at 5.7 per cent.

Headline mid-cap dividends fell 5.7 per cent on the back of lower specials, while the total paid rose just 0.8 per cent, marking a sixth quarter running of underperformance compared to larger rivals.

Michael Kempe, chief operating officer of Link Market Services, said: “Investors are being dazzled by eye-catchuk ing specials and exchangerate trimmings, but the UK’S dividend clothes are starting to look a bit threadbare underneath.

“As the world economy slows, and a looming Brexit exacerbates the underperformance of the UK economy, corporate profits are under pressure and that is limiting the scope for dividend growth.”

Link has boosted its headline forecast for 2019 by £2.8bn to £107.4bn – based on the fall in the pound and stronger special dividends – while downgrading its full-year expectations for underlying payouts by £500 million to £98.7bn.

It said exchange-rate gains are likely to account for almost two-thirds of growth, and expects special dividend to reach their second highest levels this year.

Kempe added: “Q2 marks both the second upgrade this year to our headline forecast and the second downgrade to our underlying one.

“The true picture for dividends this year is therefore notably weaker than a first glance might suggest.”