Insight & Analysis

Dividends defy downturn

Published: Sep 2023

The cost of living crisis may be hitting consumers hard, but robust balance sheets are enabling European companies to offer generous pay outs to shareholders.

Tiny fern sprouting between molten rock against all odds

The latest editions of Computershare’s UK dividend monitor and Janus Henderson’s global dividend index make for good reading for holders of stocks in some of the world’s largest European-based companies in particular.

Global dividends rose to a record US$568.1bn in Q2, up 6.3% from Q222 once lower one-off special dividends and other minor factors were considered. In Europe, 10% underlying growth exceeded the global average with pay outs jumping to a record US$184.5bn. Swiss, French and German companies all made record pay outs.

French energy company TotalEnergies has already confirmed its first and second interim dividends for 2023 will be more than 7% higher than for the same periods in 2022.

In the UK, Q1 dividends rose 4.6% to £15.2bn driven by oil companies, consumer services providers and housebuilders.

BP’s dividend per share was slightly lower in Q1 but still higher than at any other time since the first quarter of 2021, while the Chief Executive of UK infrastructure company Costain has suggested it could be about to pay a dividend for the first time since 2019 despite a drop in pre-tax profit in the six months to the end of June.

After the cuts of 2020/21, a lot of the companies and sectors that were over-distributing rebased, explains Ben Lofthouse, Head of Global Equity Income at Janus Henderson.

“Financial sector balance sheets outside the US regional banks look strong, some oil and mining companies have moved to variable dividends so they will fluctuate with commodity prices but the balance sheets are stronger than during previous cycles, and the staples, healthcare and technology sectors are growing their dividends quite consistently,” he says.

Companies reduced buybacks more than dividends during the Covid period, but since then both dividends and buybacks have rebounded strongly – suggesting that in 2021 and 2022 it was more about increasing total shareholder distributions in total rather than one at the expense of the other.

Looking ahead, Lofthouse warns the longer interest rates stay high the more likely more companies will face higher refinancing costs. “For those that have considerable debt levels – and especially those whose business model relies on high leverage – we may see dividends cut to help deleveraging,” he adds.

British American Tobacco is in the middle of a shareholder return programme that runs from May 2023 to February 2024 while reiterating the importance of cash returns to shareholders and its commitment to a 65% dividend pay out ratio over the long term.

Shell purchased US$4bn of shares in the second quarter and raised its dividend by 15% from Q1, while in August, BP announced it would spend US$1.5bn acquiring shares despite both companies reporting lower profits.

Share buybacks are contentious. Fewer shares in issue should lower the price/earnings ratio and there is also an indirect benefit to existing investors who now have a larger percentage of the company and therefore a larger stake in future profits and dividends.

“However, companies invariably describe buybacks as part of the shareholder returns, which means in some cases it can be used at the expense of dividend growth,” explains Richard Hunter, Head of Markets at Interactive Investor. “In addition, buybacks can only really create value if a stock is undervalued.”

There are other question marks over the process, such as whether the cash involved could be put to better use by reducing debt, reinvesting in the company, or even acquisitions. Management will usually be quick to point out that these avenues have been explored and that a buyback is the most prudent use of capital.

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