There have been some notable dividend increases in recent weeks from well-known companies on the stock market including a 31% hike from advertising group WPP (WPP) while banking giant HSBC (HSBA) raised its ordinary dividend by 28% on top of comments that it might pay a special dividend once the sale of its Canadian business has completed.

Even more impressively, mining services company Weir Group (WEIR) lifted its 2022 dividend by 38% with the final payout increasing 57% year-on-year after pre-tax profit jumped 40%.

This article examines recent trends in dividend payouts to uncover what might be happening. We reveal how many of the increased payouts are related to a post-pandemic catch-up and therefore a one-off, and how many are genuine step-up increases.

Finally, we identify companies which are promising big increases but at the expense of reducing dividend cover (the ratio of earnings to dividends paid) and therefore may be less reliable.

ODD TIMING TO LIFT DIVIDENDS

Rising dividends are a good indicator of financial health and give investors a positive signal about prospects. Managements are reluctant to raise dividends one year only to cut them the next which dents shareholder confidence.

However, the recent splurge in dividends comes at a curious time given the uncertain economic backdrop. Rising inflation and higher interest rates are putting a strain on consumer spending while geopolitics adds further risk to the growth outlook.

Therefore, it feels legitimate to ask why some companies would commit to large increases when the future is so uncertain. Either business is good, and the economy is stronger than many believe, or dividend increases are not sustainable.

WHICH COMPANIES HAVE GENEROUS DIVIDEND GROWTH FORECASTS?

Using Sharepad, Shares screened the FTSE 350 index excluding investment trusts for companies forecast to increase their dividend by more than 10%.

This group was then sorted by the growth rate in dividends since 2019 to see which companies had reached pre-pandemic payout levels and those which fell short.

The next step was to compare current dividend cover for each firm to separate companies which have reduced dividend cover from those where cover has been maintained or increased. These steps created three groups of companies.

DIVIDENDS HIGHER THAN PRE-PANDEMIC

This grouping had the largest number of companies and the table shows a selection of those with the biggest expected dividend increases this financial year.

The fact that some of the big banking groups feature on the table shouldn’t be a surprise given they are benefiting from rising interest rates which bolster their interest margin and cash generation. The Bank of England has increased its base rate from a 0.25% to 4% in less than a year.

According to Credit Suisse analyst Omar Keenan, UK banks are expected to return 17% of their market value to shareholders over the next 12 months and this rises to 25% in 2024.

Continued dividend hikes are more likely than not in the next couple of years from the banking sector, although the risk of higher bad debt provisions if the economy falters should also
be noted.

Software and technology firms are usually owned for their growth potential so it is noteworthy that digital transformation specialist Kainos (KNOS) is on the list of substantial dividend growers.

Kainos’ dividend is expected to increase 13% in the year to 31 March 2023 and 11% in 2024 which puts the dividend 170% above pre-Covid levels.

The same comments can be made for IT reseller Softcat (SCT) where its dividend is expected to be hiked 62% in the year to 31 July 2023 which takes it 160% above pre-pandemic levels.

Looking at Softcat’s recent dividend history, a casual observer may conclude the business was unaffected by the pandemic as the company delivered an uninterrupted increase throughout the whole period. In fact, Softcat has notched up 68 consecutive quarters of organic sales and profit growth.

CATCH-UP HIKES

The firms on this table are all expected to hike their dividends strongly, but investors should not read too much into the trend as it is related to rebuilding the payout back to levels seen before the pandemic.

Weir sits in this group; despite recently saying it would pay 32.8p in dividends for the 2022 financial year, this remains below the 46.2p per share paid for 2018.

Likewise, high street and travel retailer WH Smith (SMWH) is seeing a strong post-pandemic recovery as global travel returns to normality, but there is more work to do to rebuild the dividend which remains half the level paid in 2019.

Like many of the names on the tables in this article, it is worth remembering that WH Smith issued new equity during the pandemic to shore up its balance sheet. By having more shares in issue, the dividend money needs to be spread across a larger pool of shares so investors might want to look at the overall monetary amount paid in dividends rather than just the per share amount when doing year-on-year comparisons. Increased share count will reduce the amount paid in dividends per share unless the overall dividend pot is bigger.

Oil majors BP (BP.) and Shell (SHEL) have seen a huge increase in profit related to the surge in oil and gas prices following the war in Ukraine. Both firms have used share buybacks to reward shareholders and increased dividends less than earnings which has increased the dividend cover.

Shell has moved from a wafer-slim one times coverage in 2019 to nearly four-times. Similarly, BP has gone from an uncovered dividend to around four-times. It suggests both companies believe current elevated profitability is likely to be short-lived.

HIKES DIVIDEND BUT COVER IS FALLING

The smallest group comprises companies which have rebuilt their dividends to higher levels than pre-pandemic but reduced their dividend cover.

Cover is generally healthy across the group above three times earnings, suggesting these firms have historically paid out less of their earnings as dividends and are now increasing the ratio.

For example, Asian bank Standard Chartered (STAN) is expected to increase its dividend by 25% this year to a level which is 220% above 2019, but the cover falls from 10.7-times to 5.5-times.

It is the same story for Barclays (BARC) which has seen its dividend cover fall from 4.6-times to 3.6-times and dividends increase 207% in the last three years.

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