Positive outlook for UK bank sector dividends

HSBC Holdings (LSE:HSBA) was the world’s second-biggest dividend payer in the last quarter as the lender joined other UK banks in helping to fill the income gap left by weaker mining awards.

The FTSE 100 stock’s place behind Nestle SA (SIX:NESN) at the top of the second-quarter rankings, compiled by asset manager Janus Henderson, came as HSBC resumed three-monthly dividend distributions with a bigger-than-expected 10 US cents (7.85p) a share.

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The UK’s other banks also made increases, meaning the London market’s underlying dividend growth came in at 2.9% when excluding one-off special dividends.

On a headline basis, however, the UK’s overall dividend haul of $30.7 billion (£24.1 billion) for the second quarter was 12.1% lower than a year earlier.

That compared with the global rise of 4.9% to a record $568.1 billion (£449.7 billion), an underlying increase of 6.3% over the same quarter of 2022 as 88% of companies in the analysis either increased payouts or held them steady.

Mining stocks, which have a large exposure in the FTSE 100 index through the likes of Rio Tinto Registered Shares (LSE:RIO) and Anglo American (LSE:AAL), easily made the biggest negative contribution globally after cutting headline dividends by $6.8 billion (£5.3 billion) or 30.6%.

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Dividends paid by banks worldwide rose 19.7% year-on-year to a record $85.3 billion (£67.5 billion), representing half the growth in the period as rising interest rates boosted margins and pandemic-related disruption worked its way out of the numbers.

Ben Lofthouse, head of global equity income at Janus Henderson, expects the banking sector to continue supporting dividend growth over the rest of the year.

He said: “A weaker economic environment is typically negative for banks, but the positive effect on bank margins from the end of years of ultra-low interest rates is very powerful and is driving dividend payouts.

“The big banks are very tightly regulated and so enter the downturn in a strong capital position.”

Having recently upgraded its 2023 forecasts, Janus Henderson continues to expect global payouts 5.2% higher on a headline basis to a record $1.64 trillion and equivalent to underlying growth of 5%.

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European payouts led the way in the second quarter, up by 9.7% on a headline basis or 10% without special dividends. This reflected strong profitability in the 2022 financial year and as most European companies made their customary single annual payment.

The quarter is also seasonally important in Japan, where payouts rose 8.4% on an underlying basis as half of companies in the research delivered double-digit increases.

US growth of 4.6% slowed for the sixth consecutive quarter, although Janus Henderson said this was still a creditable increase as 98% of US companies in its index either raised payouts or held them steady, well above the global average.

Healthcare companies were the biggest drivers of US growth in Q2, led by UnitedHealth Group Inc (NYSE:UNH) and Eli Lilly and Co (NYSE:LLY). The two biggest dividend cuts were by chip maker Intel Corp (NASDAQ:INTC) and private equity firm Blackstone Inc (NYSE:BX).

Weak spots in the research included Hong Kong, where a quarter of companies cut their dividends.

One-off special dividends halved in the quarter, having been exceptionally high in 2021 and 2022 after the pandemic disrupted regular payment schedules. The $12 billion (£9.4 billion) paid was much more in line with the pre-pandemic Q2 average.