UK-listed companies reported payouts of £28.5bn during the third quarter of the year after a rise in special dividends, prompting Capita Asset Services to rise its full-year forecast to £94bn.
The firm had forecast a “much quieter” second half. However, a 40 per cent rise in special dividends contributed to a 14.3 per cent year-on-year rise in third-quarter payouts.
As well as representing a record Q3 haul, it was also the third-largest quarterly total ever paid, although it was less dependent on one-off currency exchange effects.
Justin Cooper, chief executive of Shareholder Solutions, part of Capita Asset Services, said: “Generous payouts have been topped up by big exchange rate gains between January and June and very large special dividends, setting 2017 up to be a sparkling year.
“The lustre will dim markedly in the fourth quarter, however, as the potential for further upside surprise has diminished.”
Performance of sterling vs US dollar since EU referendum
Source: FE Analytics
Since last year’s referendum, sterling has fallen by 3.55 per cent against the US dollar, as the above chart shows. However, sterling has performed better this year as dollar strength has fallen away.
Cooper added: “Exchange rate gains will be gone in 2018, unless the pound takes another jolt downwards as the Brexit talks unfold, and most of the big companies who cancelled dividends in recent years have already restarted them, so that additional sparkle will have dulled.
“Even so, the overall value distributed by UK plc is likely to remain at or near 2017’s record levels.”
Around one-third of Q3 dividends were paid in dollars and investors could see an exchange rate loss during the fourth quarter of the year – the first time in three years – Capita warned, as payouts are translated at a less favourable exchange rate.
“This loss will be larger than we originally expected if current exchange rates persist at roughly their current levels until the end of December, and will largely cancel out growth at the company level in Q4,” the firm noted, adding that the fourth quarter will likely “feel disappointing after such a strong first three quarters of the year”.
Mining companies accounted for two-thirds of the total increase in quarterly dividend payments, with payouts rising by 262 per cent or £2.4bn to £3.3bn.
It comes after a period where the sector cut back on dividend payments following a drop-off in commodity prices to preserve cash, Capita noted.
However, commodity prices have since begun to bounce back and miners’ profits have also increased.
“After a prolonged period in the doldrums, commodity prices began to rebound a year ago, driving mining profits higher, as rising revenues met stream-lined cost bases,” Capita noted.
“Earlier in the year we pencilled in restored payouts from all the major players, but the seam has been richer than investors expected with the haul almost quadrupling in the third quarter to £3.3bn.”
The largest paying sector was oil, gas & energy although its payouts of £4.5bn were flattish, rising by just 4 per cents year-on-year. After miners, the airlines, leisure & travel sector recorded the biggest year-on-year change with payouts up 110 per cent to £1.3bn.
Rolling 12-month dividends
Source: Capita Asset Services
Special dividends also made a bigger contribution to special dividends during the quarter with the rise largely attributed to a one-off payment by catering services group Compass Group of almost £1bn – around two-thirds of total special dividends for the quarter.
The FTSE 100 company announced the special dividend on top of its regular dividend in May in line with its policy of returning surplus cash to investors.
Housebuilder Taylor Wimpey also announced a special dividend during the quarter, further boosting payouts during the quarter.
Dividend growth by the top 100 and mid 250 companies increased by 14.5 per cent and 12.2 per cent respectively. However, the prospective yield on equities over the next 12 months remained unchanged at 3.7 per cent.
“Equities remained comfortably the most attractive of the main asset classes for income, as they have for several years now,” noted Capita.
“The UK 10-year gilt yield rose a touch over the quarter, reaching 1.4 percent while instant access savings and residential property (after running costs) were unchanged at 1.3 per cent and 2.9 per cent respectively.”