Nunc Est Dividendum

Dividend growth leaves UK behind

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What's going on?

Global dividend payments hit a record high in the first quarter of 2019 – but UK companies are proving the ghost at the feast.

What does this mean?

Analysis of the world’s largest 1,200 companies out on Monday showed that dividends – the portion of profit companies pay out to their shareholders – shot up by 8% last quarter compared to a year before. A total of $263 billion was distributed to investors, with almost 90% of US companies increasing their payments – particularly banks. And global dividends are predicted to climb 4% overall this year to an eye-watering $1.4 trillion.

But not everybody’s pulling their weight. UK companies posted only 4% dividend growth on average last quarter, compared to 10% at US firms. At least some grew; last week British-headquartered telecoms giant Vodafone slashed its dividend 40%, the first cut since 1990.

Why should I care?

For markets: Dividend growth isn’t necessarily a good thing.

Some investors consider dividends to be an indicator of a company’s health, but perhaps not how you might think: choosing to distribute rather than reinvest profit may be a sign that there are few growth opportunities for the business. Indeed, many American executives now believe a US slowdown is on the way – and further untoward trade developments could still see January’s recession fears reappear.

The bigger picture: Dividends have drawbacks.

Companies can reward shareholders in several ways – by their stock price rising, by paying a dividend, or by buying back shares. While dividends provide a nice cash payout, they’re typically subject to immediate taxation. Buybacks, which reduce the number of shares in circulation, often lead to a higher share price for those remaining – and those gains aren’t taxed until the shares are sold. That may be one reason why buybacks are even more popular than dividends: US companies alone spent over $800 billion buying back almost 3% of their shares last year. Then again, the tendency of US executives to have their bonuses linked to earnings per share growth may play a part…

Originally posted as part of the Finimize daily email.

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