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Oil and gas companies with excess capital can choose to funnel money into investment – including the energy transition – or shareholder payouts. They often choose the latter, since investors seek high returns from oil stocks.Matthew Brown/The Associated Press

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Investors enjoyed a record haul for global dividends in the third quarter (Q3) as soaring oil payouts fuelled a 7 per cent rise over the same period last year.

Without the US$19.9-billion contribution from the oil sector, the global total would have been flat year over year, according to Janus Henderson Global Dividend Index. Total global payouts hit US$415.9-billion in the three months ended Sept. 30.

“The energy crisis drove a large rise in dividends in the third quarter as oil companies distributed record profits to shareholders,” the asset manager said in its latest dividend report.

The increase was driven by special dividends, one-time payments, which are typically larger than normal payouts, while the biggest jumps came from companies in Brazil, Hong Kong, the U.S. and Canada.

Oil and gas companies with excess capital can choose to funnel money into investment – including the energy transition – or shareholder payouts. They often choose the latter as investors seek high returns from oil stocks.

The bumper Q3 has driven up Janus Henderson’s headline dividend expectations for 2022 by US$30-billion to US$1.56-trillion, up 8.3 per cent year over year.

Although the prospect of a recession is likely to dent earnings, companies are often reluctant to reduce payouts, the report said. Companies including BP PLC BP-N and Shell PLC RYDAF cut payments to more sustainable levels during the pandemic, which may give them room to maintain dividends if profits come under pressure in 2023.

“Next year, the outlook is dependent on the global economy. ... If we are headed toward a recession, earnings will be impacted,” says Jane Shoemake, portfolio manager for global equity income at Janus Henderson Investors.

“But the good news is that dividends tend to be more resilient. Generally, companies don’t want to cut and reduce them.”

U.K. dividends rose 2.5 per cent on an underlying basis – adjusting for special dividends, changes in currency, timing effects and index changes – while 84 per cent of U.K. companies raised payouts or held them steady.

The pound sterling took a battering over the period, but a weak pound boosts U.K. dividends from U.S. dollar-based behemoths such as HSBC Holdings PLC HSBC-N and Rio Tinto Group RTPPF. Two-fifths of U.K. dividends are paid in dollars by large multinationals with headquarters in London.

“The dollar impact for U.K. businesses with U.S. revenue exposure is massive,” says Nick Fowler, managing director of equity capital markets at Lazard U.K. Financial Advisory.

“How it plays out will depend on bigger-picture dynamics, for example, what does a company’s cost base look like with high inflation and interest rates?”

Analysts say although the U.K. market might be undervalued, it faced political and economic turbulence.

“The U.K. market has been cheap for a long time, as we do tend to have more sectors which tend to be value stocks,” says Tineke Frikkee, head of U.K. equity research and fund manager at Waverton Investment Management Ltd. “The main thing to ponder is, what would get people investing? The Brexit vote has increased uncertainty and recent government turmoil hasn’t helped.”

Taiwan, Hong Kong and the U.S. were the biggest contributors to dividend growth, while China lagged the rest of the world at 6.7 per cent. One-third of Chinese companies cut dividends, with real estate a particular weakness. However, Beijing’s plans to support the property market and the prospect of reopening could buoy growth, Janus Henderson suggests.

“It’s encouraging to see those steps, and it will be interesting to see how they move on from zero-COVID-19,” Ms. Shoemake says.

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