Investors generally care about one thing - getting a return on their investment.
“Do I believe this company is going to be successful enough that I can get a return on my initial investment?” is often the question that will go through the mind of a would-be investor.
If you were one of the ones to get a share of Shell, BP, Aviva, and most recently BHP, you would be rewarded with a heftier than usual payout.
Shell said it would be giving its investors £6.5bn in dividends after it posted record revenue of US£15bn in the second quarter.
Competitor BP offered a smaller payout, at £910mln, although it did increase the amount of its share buyback program to £2.9bn.
British Gas owner Centrica reinstated its dividend after two years on the back of surging gas and energy prices, giving £59mln to shareholders.
Even the insurer Aviva bucked the trend of its industry and boosted its dividend by 40% to 10.3p per share, roughly £400mln.
Today’s announcement by BHP followed suit of the firms in the oil and gas and energy industry, with the miner set to pay out a record £13.5bn in dividends after posting its highest ever full-year profit.
One thing that the companies mentioned have in common, excluding Aviva, is that they are reaping the benefits of soaring commodity and energy prices.
With 97 out of 100 FTSE 100 companies (Rolls-Royce, IAG and Ocado the exceptions), expected to pay a dividend in 2022, there is an argument to be had that shareholders have never had it better.
Is this the best it has been?
“This year is shaping up to be a fruitful year for UK investors,” said Joshua Warner, market analyst from City Index.
Dividends from London’s blue-chip index companies are expected to hit £85bn for the year, just shy of the record set four years ago of £85.2bn as companies continue the road to recovery following the pandemic.
Of course, the big winners are the oil and gas companies, Shell and BP, which are benefitting from the soaring costs.
Much of this, according to Michael Hewson, a chief market analyst at CMC Markets is catchup from 2020, where dividend payouts dropped dramatically due to COVID, which “prompted a lot of companies to bolster their balance sheets and reduce their debts.”
Why isn’t the cash being reinvested?
There's a few reasons why the big oil giants and BHP in particular have decided to give back to shareholders as opposed to reinvesting the cash back into the business.
Warner suggests that “one-off distributions make sense as there is no guarantee they will maintain existing levels of cashflow if prices drop over the coming years.”
“They don’t want to make their ordinary payout, which they aim to grow steadily and reliably, unsustainable.”
Essentially, it makes more financial sense to give one big dividend while the cash is available rather than a slightly smaller one that investors may expect to become the norm and one that simply isn’t sustainable.
Additionally, the current political environment and uncertainty, along with politicians “who can’t see beyond the nose of the next opinion poll” according to Hewson don’t “speak to a stable investment environment.”
“What company in their right mind would undertake to invest huge amounts of money into a long-term projects, against the current set of pound shop politicians we have these days.”
Add in the talk of a windfall tax, it makes sense to return as much money back as possible to shareholders now.
Is it sustainable?
For the entirety of the FTSE 100 list, dividends are expected to grow and hit all-time records in 2023, according to Warner, although inflation and interest rates continue to form a dark cloud over the market.
Warner adds “ordinary dividends should continue to grow considering the average dividend cover in the FTSE 100 sits over the 2.0x threshold, suggesting they are sustainable.”
However, for the likes of Shell and BP, bumper cash handed back to investors will be a one-off.
Naeem Aslam, a market analyst at Avatrade, believes the level of dividends paid by Shell and BP is unsustainable.
Oil prices are starting to settle below US$90 per barrel, their lowest level since the war in Ukraine at the end of February.
As alternative supply chains open, this should also push prices further down, meaning the profits are nowhere as high as this year, and as such the dividends stabilise.
It is also worth noting that over half the value of dividends given by the UK’s 00 biggest companies will come from just 10.
From an investor’s point of view, therefore, not every company on the index will be as fruitful as each other, so knowing where to put your money is important.
Next year is predicted to return more cash to shareholders than this, just don’t expect big one-off payments from BP and Shell like this year.