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UK dividend growth begins to sputter in third quarter amid global uncertainty and political crisis

While payouts had risen 6.9% in the third quarter, this had been reliant on an "exceptionally high" number of specials, with underlying payouts down 0.2%

Vodafone Group plc - UK dividend growth begins to sputter amid global uncertainty and political crisis

Growth of dividends from UK companies has slowed in the third quarter of the year as global economic uncertainty and the UK’s ongoing political crisis, despite being masked by an upsurge in special payouts.

According to the latest dividend report from data firm Link Group, UK dividends have risen 6.9% in the quarter to £35.5bn, a record for the period but slower than the 14.5% growth of the second quarter.

The growth was also reliant on what Link said were “exceptionally high” special dividends, and that underlying divis, which exclude specials, had fallen by 0.2% to £32.3bn, thanks mainly to a large cut from telecoms giant Vodafone PLC (LON:VOD).

The underlying figure was also reliant on payouts denominated in US dollars and euros, which had seen their value boosted by the recent weakness in sterling. On a constant currency basis, dividends declined by 3%.

Link said payouts in the quarter had been led by banking stocks, with a surprise £1.7bn divi from Royal Bank of Scotland Group PLC (LON:RBS) in its first-half results in August providing most of the lift.

Mining stocks also jumped by around a third thanks to strong dividends from Rio Tinto plc (LON:RIO) and BHP Group PLC (LON:BHP), both of which delivered fat specials to shareholders.

At the other end of the scale, Vodafone’s reduction hit the performance of telco stocks, where divis dropped 40% in the quarter, while retailers were also dented by cuts from a number of high-street names.

FTSE 100 companies saw headline payouts increase in the period, although they fell on an underlying basis, while mid-cap divis dropped 1.7%.

However, looking ahead Link said that they were “paradoxically” upgrading their forecasts for the year to reflect what they expected would be further declines in sterling and a growing haul of special divis, predicting a total payout for 2019 of £110.3bn, a headline increase of 10.4% and underlying growth of 3.3%.

Special dividends, in particular, are expected to reach their second-highest level ever over the year of over £11bn, with miners leading the charge accounting for one-third of the total.

However, stripping out specials and the gains from sterling’s depreciation, Link estimated that payouts would ultimately grow by less than half a per cent in the year.

“The predicted economic slowdown is beginning to show as UK plc payouts falter after years of solid growth despite the gloss of huge special dividends and eye catching [foreign exchange] effects”, said Link’s chief operating officer Michael Kempe.

“As the world economy falters and the UK remains mired in its political crisis, we are witnessing a significant slowdown in UK plc’s dividend growth rate. This is inevitable given the increasingly lacklustre performance companies are putting in on earnings. Unlike 2016 it is not due to problems in just one sector; it is a more generalised slowdown.”

Kempe added that 2019 would “almost certaintly prove a temporary high-water mark for UK dividends”, although yields still remained extremely attractive and that payouts would have to fall further to bring them back in line with historic averages, a decline he said was “extremely unlikely”.

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