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Various big name UK stocks intend to pay out billions of pounds in cash 
Thursday 05 Aug 2021 Author: Daniel Coatsworth

Billions of pounds worth of dividends have been declared in recent weeks by names such as Anglo American (AAL), Rio Tinto (RIO) and Royal Dutch Shell (RDSB), meaning there is a cash bounty on its way to shareholders.

These companies, along with other big names declaring dividends including Lloyds (LLOY) and Diageo (DGE), have benefited from economic recovery which boosts demand for their products and services. Billions of pounds will also be spent by many of these companies on share buybacks.

It begs the question as to whether we’re at a turning point for these businesses, namely the start of a new growth phase. When companies have so much spare cash on their books, it has historically stirred boardrooms to go on a spending spree.

Lloyds announced a £390 million acquisition of financial services group Embark alongside its latest results to help strengthen its position in the retirement market, but the biggest dividend declarers of Rio Tinto and Anglo American aren’t following the usual playbook for the mining sector.

Historically we’ve seen mining companies make lots of acquisitions in periods when commodity prices are high – such as now. A decade ago, the big miners were saddled with large debts after paying top dollar for acquisitions just before commodity prices started to fall. They’ve learned their lesson and are being cautious now, preferring organic rather than acquisitive growth.

‘Historically this sector has been the architect of its own demise by overpaying for growth at the top of the cycle,’ Royal London fund manager Richard Marwood told Shares.

BP (BP.) and Royal Dutch Shell are benefiting from strength in the oil price, and Shell has just raised its dividend by 38%. In theory, both companies might be tempted to keep investing in oil assets while the price is high. Marwood says that won’t happen, adding: ‘They’ve given themselves a mandate that won’t really allow oil and gas acquisitions.’

A bigger concern is whether BP and Shell overpay for renewable assets in the race to transition away from fossil fuels to more environmentally friendly energy sources.

This raises an important point. A lot of companies are swimming in cash and handing lots of it back to shareholders. But isn’t there a better use of that money, such as investing to improve operations or making the business fit for the modern age?

David Johnson, an analyst at research group Kepler, goes as far as suggesting the golden age of dividends could be nearing an end. He implies the new era of ESG – environmental, social and governance – might result in shareholders’ interests no longer being put above those of other stakeholders, which could spell lower dividends.

Johnson also suggests that some of the traditionally big dividends payers, such as oil companies, could sell their prized cash-generating assets or be taken over, thereby reducing the pool of dividend stocks on the UK market.

It also worth considering that younger companies are putting less emphasis on dividends than older businesses as they choose to reinvest cash for growth. Over time that could set a new precedent for the level of dividends around the world.

One thing is certain: you must never take dividends for granted as companies can reduce or cut off that flow of money whenever they like.

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