The post-pandemic boost in ‘catch-up’ dividends ran out of steam last year as special, one-off payments dropped by a third to £9.5bn, said Link Group as it forecast overall distributions to UK investors would be flat this year. 

Mining, the top dividend-paying sector over the last two years, saw payouts decline in the second half of 2022 as commodity prices eased, while banks and oil companies increased dividends enjoyed as interest rates and energy prices rose.

Despite the decline for miners, the sector is not at risk of losing its number one status, according to Link’s latest quarterly UK Dividend Monitor. Mining dividends accounted for £1 in every £6 distributed by UK companies in 2022, double their average over the last decade. The sector would need to see its payouts fall by 33% to lose the top-paying sector status, which is unlikely, Link said.

‘The biggest uncertainty is what happens in the mining sector. Our base case is that mining payouts will continue the fall that began in the middle of 2022, but commodity prices have recovered a little recently, and coal, a significant earner for Glencore (GLEN), is enjoying the energy price boom,’ said Ian Stokes, managing director of UK and Europe corporate markets at Link Group.

‘Banking and oil should remain the biggest growth drivers and we are anticipating GSK’s large spin-off Haleon paying its first dividend too.’

A year ago Link predicted miners would not repeat 2021’s £15.3bn bonanza as commodity prices rocketed after the pandemic. This forecast proved wrong, however, as commodity prices soared after Russia’s invasion Ukraine, leading to payouts of £16bn. In 2022, banks paid out £10.2bn and oil and energy firms, £9.8bn.

Banks are enjoying a boost in profit margins as interest rates climb and paid shareholders 80% more in 2022, including special dividends, accounting for one quarter of the underlying increase. Oil dividends rose by a quarter last year, despite huge sums spent in share buybacks.

Link Group forecasts an underlying UK payout increase to £86.2bn, a 1.7% gain on 2022, although 2023 will see headline payouts fall 2.8% thanks to lower special dividends, Stokes said.

‘We do expect underlying dividends to grow in 2023. Companies would rather reduce share buybacks than cut dividends. With the former so high, there is plenty of wiggle room, though corporate cash balances have been depleted by the record share buybacks,’ Stokes said.

Special dividends totalling £9.5bn was above the longer-term average after significant one-offs from Aviva (AV), Natwest (NWG) and Glencore.

The ongoing recovery after the steep cuts made during the pandemic extended to the FTSE 250-listed mid-cap companies last year, which saw headline dividend growth of 5% and an underlying 23.8% growth excluding special dividends.

Growth continued into the last quarter at 18.2%, driven by industrials, financials and the restoration of ITV’s interim payout, having brought back its final dividend earlier in the year.

Link anticipates a year of slower growth for the mid-caps as they feel the pinch from a UK recession, although the Bank of England believes the downturn could be shallower than it feared in November.

Record share buybacks last year diverted cash away from dividends as boards chose to enhance returns on the remaining equity capital. In the fourth quarter, buybacks reduced dividends by £300m, particularly across the oil, tobacco, food and retail sectors, Link estimates, with mining and chemicals softer than estimated.

Oil giant Shell (SHEL) bought back over 8% of its shares last year, equivalent to £16bn, and the UK as a whole spent £50bn, double 2021’s total.

A weak pound in 2022 added £3.8bn to the value of UK payouts as over two thirds of FTSE 100 companies declare payments in dollars or euros.