Shareholder benefits are not immune from the effects of the cost-of-living crisis, but UK companies are expected to continue to pay relatively generous dividends this year.

The latest edition of Link Group’s UK dividend monitor – which covers company pay outs for the final three months of last year – found that UK dividends rose 8% to £94.3bn in Q422. This figure would have been even higher but for a record level of share buybacks over the last 12 months equivalent to around £50bn or 2% of UK market capitalisation.

Almost every sector delivered double digit growth, though food and utilities recorded lower increases than banks and oil companies.

Companies currently operating large share repurchase programmes include Shell, BP, BAT, BAE, Unilever and Diageo. Link Group calculates that Shell bought back over 8% of its shares over the course of 2022 alone (at a cost of US$19bn) and has spent US$50bn in this way over the last five years.

Large payments from Aviva, NatWest and Glencore contributed significantly to last year’s one-off special dividends total of £9.5bn. Such payments were much less common in the final quarter of the year though with the largest special dividend paid by recruitment firm Hays.

Dividends for the top 100 UK companies were held back in Q422 by the reduction in GSK’s dividend following the spin-off of Haleon, while mid-cap growth was driven by industrials, financials and the restoration of ITV’s interim pay out, having brought back its final dividend earlier in the year.

Ian Stokes, Managing Director Corporate Markets UK & Europe at Link Group says underlying dividends will grow in 2023 as companies would rather reduce share buybacks than cut dividends. “The biggest uncertainty is what happens in the mining sector,” he says. “Our base case is mining pay outs will continue the fall that began in the middle of 2022, but commodity prices have recovered a little recently and coal – a significant earner for Glencore – is enjoying the energy price boom.”

Banking and oil should remain the biggest growth drivers and Haleon is expected to pay its first dividend, although chemicals company Synthomer has cancelled all pay outs for 2023 as part of a deal with its creditors.

Overall pay outs will also be impacted by Direct Line’s decision to scrap its final dividend for 2022 as a result of higher than expected claims due to bad weather.

Charles Luke, Investment Manager at Murray Income Trust observes that the pandemic helped strengthen the dividend position of many UK companies who had previously been over-paying, leaving pay outs looking extremely stretched relative to earnings. The pandemic allowed these companies to reset dividends at a lower level, improving dividend cover – the extent to which dividends are covered by earnings.

Many of the other factors that improved the UK’s dividend picture are also still in place. There is strong support for some of the UK’s key sectors with rising interest rates favouring financial services companies, for example, while the energy transition looks to provide long term support for companies involved in extraction.

This broadly positive outlook will come as a relief to UK shareholders who were left disappointed last October when the chancellor, Jeremy Hunt, reversed the decision of his predecessor Kwasi Kwarteng to reduce income tax on dividends to 2021-22 levels.

The decision meant those who received dividends in excess of the £2,000 annual tax-free allowance would pay either 8.75%, 33.75% and 39.35% tax on dividends – depending on which tax band they fell in to – rather than 7.5%, 32.5% and 38.1%. The government estimated this would increase its annual tax take from dividend payments by approximately £1bn.