U.K. Dividends Soar 25%

The cash dividends paid by U.K.-listed PLCs surged by 25% in the first quarter of 2012 to hit an all-time high. However, "signs of weakness lurk behind the headline," according to Capita Registrars, compiler of the quarterly Dividend Monitor report.

Delicious dividends
Here's how the first-quarter dividends from U.K. PLCs have soared, dipped, and surged since 2007:

As you can see, dividends rose strongly in 2008 and 2009, but fell back 2% in the first quarter of 2010, as companies reined in their cash payouts in the aftermath of the global financial crisis.

Nevertheless, first-quarter dividends have grown strongly in the past two years, rising by 10% in 2011 and a huge 25% in 2012. Thus, in the round, dividends have been remarkably reliable during the biggest financial meltdown since the 1930s.

Two big bonuses
However, Capita Registrars warns that the latest quarterly total of 18.8 billion pounds was boosted by huge one-off dividends from two corporate powerhouses.

First, telecoms giant Vodafone (Nasdaq: VOD) paid out an extra 2.2 billion pounds to its owners, in the form of a 4 pence-a-share special dividend paid Feb. 3. This came after Vodafone received a maiden dividend of 2.8 billion pounds on Jan. 31 from its 45% holding in leading U.S. mobile operator Verizon Wireless.

Second, oil and gas producer and FTSE 250 member Cairn Energy paid its shareholders a special dividend of 2.2 billion pounds (this figure also includes the issue of B shares). This followed the sale of various assets in India to Cairn's FTSE 100 rival Vedanta Resources (LSE: VED).

Dividend growth slows
With mega-cap businesses building up vast war chests of cash, special dividends are likely to become a frequent feature of the future picture for dividends, so we shouldn't entirely overlook them.

Even so, Capita Registrars warns that -- after removing special payouts -- underlying dividend growth is weaker than it expected. Adjusting for one-off factors, underlying growth was 6.6% in the latest quarter, versus an increase of 12.8% for 2011. This is also below the underlying growth of 8.2% that Capita predicts for 2012 as a whole.

Despite weaker-than-expected growth in the first quarter, Capita has upgraded its full-year forecast for dividends in 2012 by 1.3 billion pounds to 76.3 billion pounds. This is 8.3 billion pounds more than 2011's payout of 68 billion pounds, which is an uplift of nearly an eighth (12.2%).

FTSE 100 versus FTSE 250
What's more, blue chip members of the elite FTSE 100 index boosted their cash payouts, while dividends declined at mid-cap FTSE 250 firms. FTSE firms lifted their dividends by a generous 27.6% year on year to 17.7 billion pounds. This means that these corporate heavyweights paid out the vast majority (94%) of all U.K. dividends.

Then again, this total was boosted by the large one-offs mentioned above. Stripping these out, underlying growth dividend was a "slightly disappointing" 7.7%. This growth was trimmed by large share-buyback programs at dividend giants Vodafone and AstraZeneca (NYSE: AZN). By buying back large numbers of their shares, these two blue chips distributed smaller dividends, paring back the overall total.

Alas, the first-quarter dividends paid by mid-cap firms actually fell by 90 million pounds to 915 million pounds, a drop of 9%. This means that FTSE 250 firms account for below 5% of total dividends paid between January and March.

Furthermore, this was the first quarterly decline in FTSE 250 dividends since 2009. This dip can partly be explained by technical factors relating to companies being promoted to the FTSE 100, but Capita warns that "there is also evidence of real weakness."

For instance, Cable & Wireless Communications slashed its latest payout by 24 million pounds and has suspended future dividends in order to preserve cash. In addition, around 50 million pounds of the 90 million pound decline comes from "general caution among mid caps about paying dividends."

Concentrated dividends
In the first three months of this year, 159 firms paid a dividend -- two more than in the first quarter of 2011. Of these 159 companies, 115 increased, commenced or reinstated payments, versus 124 in this category in Q1 2011. However, 26 firms cut their dividends, against 20 who did the same a year previously. Nine firms held their dividends, while only four canceled them.

Of course, there are several thousand businesses listed on the London Stock Exchange and its junior market, the Alternative Investment Market. Thus, the vast majority of U.K.-listed companies don't pay currently dividends to their owners and, indeed, most never have.

Therefore, this wave of dividend cash is highly concentrated, with the majority of it being handed over by a few "dividend monsters." In fact, most of the prospective 4% dividend yield on offer from the U.K. market comes from five massive firms.

Together, these five giants -- Vodafone, Cairn Energy, Royal Dutch Shell (NYSE: RDS-B), AstraZeneca, and HSBC Holdings -- paid 10.8 billion pounds of dividends in the first quarter. In other words, 58% of the total cash paid out came from these five multinational corporations.

What's more, the top 15 dividend payers accounted for 16.4 billion pounds of first-quarter dividends, 87% of the total, making these companies the U.K.'s dividend monsters!

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