U.K. dividend payouts soared by 25% in the first quarter of 2012 to reach £18.8bn ($30bn), according to the latest Dividend Monitor report from Capita Registrars, which analyses data provided by Exchange Data International.
In total, British firms paid out £3.8bn ($6.1bn) more than the same period in 2011, making 2012 a record for the first quarter.
Special dividends galore
Special dividends were a big feature of 2011, and Capita is expecting that these are going to make an even larger contribution to the 2012 totals.
The headline total dividend payout for Q1 was boosted by two very large distorting factors. Vodafone (VOD) and Cairn Energy each paid out £2.2bn ($3.5bn) in the form of special dividends, (the latter in an unconventional structure, which Capita opted nevertheless to include in the analysis).
Vodafone's reflects the strong performance at Verizon Wireless, in which it owns a 45% shareholding, while Cairn was returning cash to shareholders on the disposal of assets in India.
Adjusting for one-off factors underlying dividend growth was just 6.6% year on year in the first quarter, much slower than the 12.8% underlying increase in the full year 2011 and below Capita's forecast growth rate for 2012.
The FTSE 100 dividend payouts grew 27.6% year on year to £17.7bn ($28.3bn), boosted by the big special payments. Underlying growth was however a slightly disappointing 7.7%.
This is partly according to Capita because the share counts at Vodafone and AstraZeneca (AZN) (two of the dividend giants) have shrunk more than Capita expected due to very large share buyback programmes, so the total dividend distribution from these firms is lagging some way behind the per share dividend increase.
While the one-offs have made the big difference, Capita were surprised by falling dividends from the FTSE250 - for the first time since 2009. Capita believes this is because they were deciding payments during the Q4 economic soft patch and when the credit markets began to dry up again during the euro crisis. The experience during the 2008/9 crunch was that firms hoarded cash.
The FTSE 250 showed most weakness, although its dividends made up a mere 5% of the Q1 total. The dividend payout fell £90m (9%) year on year to £915m, the first quarterly decline since 2009. Part of the weakness reflects technical factors to do with stocks being promoted to the FTSE100.
159 companies paid a dividend in the first quarter, two more than the same period last year. Of these, 115 increased, commenced or reinstated payments, compared to 124 who did so in Q1 2011. 26 cut them, more than the 20 who cut last year. Nine held them steady and only four cancelled them.
After the £5.1bn ($8.2bn) from the oil & gas sector, telecoms was the next largest sector paying out £4.2bn, with a further £2.7bn ($4.3bn) coming from healthcare.
Financials contributed £2.1bn ($34.bn). Basic industries, consumer services, healthcare and utilities all saw a fall in their first quarter dividend payouts, the most dramatic in the utilities sector.
UK 2012 dividend payout prospects
With dividend growth running behind the increase in the value of shares over the first quarter, the prospective dividend yield has slipped for the next twelve months.
In January, the prospective yield for the FTSE100 was 4.5%, but it is now 4.1%. For the FTSE 250, it is now 3.1%, down from 3.7%. It is 4.0% for the market overall.
In comparison, 10 year gilt yields in the U.K. are still only 2.2% having fallen from 3.7% last April, while private account savings rates (instant access) are still 3.1% according to Capita.
Balance sheets are currently in good shape owing to high margins and low investment. Ernst & Young's Item Club recently estimated U.K. Plc's cash pile at £754bn, about half of GDP.
Capita expects an acceleration in U.K. dividend payouts as the year progresses, providing the eurozone doesn't implode again.
Capita has in fact revised its headline forecast for the full year upwards by £1.3bn ($2.1bn) to a new cash record of £76.3bn ($122bn), reflecting the Cairn Energy effect.
This is an increase of 12.2% on 2011, but is still short of the £77bn ($123bn) needed to top 2008 after adjusting for inflation. However, despite the higher headline forecast, Capita has cut its underlying forecast growth rate to 8.2% for the full year to reflect the slower first quarter.
The eurozone still presents the biggest risk to Capita's forecast. Peripheral economies are still in big trouble and the crisis may yet derail the British economic recovery, rather than simply slow it as it has to date.
Charles Cryer, Chief Executive of Capita Registrars said:
"2012 will comfortably be another record year for dividend growth. We have upgraded our headline forecast to reflect the big one-offs, but the picture is more complex than the headlines suggest.
The economy stumbled in the fourth quarter as the eurozone crisis knocked confidence in Britain and raised fears of a new credit crunch. Access to finance is a crucial factor determining how much firms are prepared to pay out nowadays, so fears of a renewed funding crisis in the banking system will have a knock-on effect. Roughly two thirds of firms who paid in the first quarter decided their dividends before the New Year; the Q4 economic weakness seems to have caused them to show greater caution.
Early evidence suggests the economy was in better shape through the first quarter, and as the eurozone crisis abates, this may give companies greater confidence to return cash as the year goes by. For this reason we expect dividend growth will accelerate from here, but not enough to meet our original underlying forecast. Europe's problems remain very serious. With the focus moving towards Spain, the crisis could return at any time, so the risks for the rest of the year are high."
The quarterly Capita Registrars Dividend Monitor report analyses the latest trends in total gross UK dividend payments (before 10% withholding tax), sector performance and the biggest companies and updates the forecast for the full year.
Disclosure: I am long VOD. We run the Dividend Income Portfolio which owns a shareholding in Vodafone Plc, purchased when the share was historically undervalued as per our valuation methodology.