Due to a recovery in bank payouts, regular dividends in the UK are projected to increase by 6.1% to £88.9 billion ($114.8 billion) in 2023, with HSBC becoming the largest payer for the first time since 2008.
The estimate by financial services provider Computershare is £2.7 billion higher than the April forecast and reflects improved profit prospects in the interest-sensitive sector.
“The banking sector benefits from the interest rate medicine applied by the Bank of England to cool down inflation fever,” Computershare added.
“While bad debts are likely to rise at some point, bank profits and dividends are increasing at the moment.”
Bank payouts are now comfortably the “biggest engine” driving dividend growth in the UK, according to Computershare, a sharp contrast to three years ago when lenders were not allowed to pay dividends due to the ongoing COVID-19 pandemic.
Computershare’s latest quarterly Dividend Monitor showed that bank payouts on an underlying basis rose by 61% to approximately £7.8 billion in the second quarter. The sector is expected to increase payouts by over £3 billion this year.
In May, HSBC reported that first-quarter profits tripled as rising interest rates boosted income, exceeding analysts’ forecasts and enabling the company to pay its first quarterly dividend since 2019.
After HSBC, the top payers in the quarter ending June were mining companies Rio Tinto and Glencore, oil company Shell, and cigarette maker British American Tobacco.
These five companies paid 34.8% of the total dividends, amounting to a combined £11.4 billion, according to the company.
Despite mining companies being among the top payers, their dividends decreased by a third in the quarter due to falling commodity prices, which had the most significant negative impact on overall dividend growth.
Computershare also stated that the main payouts are expected to decline by 1.7% to £92.4 billion in 2023 due to lower one-off dividends and negative currency effects.
This estimate is £1 billion higher than what was predicted three months ago.
In the second quarter, UK dividends increased by 3.5% on an underlying basis but declined by 9% on a nominal basis to £32.8 billion, according to the company.
Meanwhile, the expected 12-month return on UK equities has risen to just under 4.0%, up from 3.7% in April, although gilts and cash savings now offer significantly more, it added.