AIM dividends rebound as new pension rules trigger payout warning

A second-quarter dividend boom among AIM-listed companies has helped fuel a strong half-year post-pandemic recovery, according to data compiled for Link Group’s dividend monitor.

First-half dividend growth for small-cap companies listed on the London Stock Exchange’s (LSE) AIM market came in at 40.7 percent after a Q2 boost when underlying dividends (which exclude one-off special dividends) soared 56.6 percent to £265 mn ($365 mn), says Link.

The ‘rebound’ comes after AIM payouts fell 40.4 percent during the first four quarters of the pandemic, notes Link, ‘taking [AIM dividends] back to a level last seen in mid-2016.’ Despite the drop, Link says the ‘junior market actually showed remarkable resilience’, while Main Market payouts fell 41.6 percent in the first year of the pandemic to a level last seen in 2011.

Ian Stokes, Link managing director for corporate markets UK and Europe, notes in a statement that AIM companies had to move fast to preserve cash as the pandemic hit. ‘[These companies] are more vulnerable to economic disruption than their multinational counterparts,’ he explains. ‘They are less diversified and have more limited access to funding.’

Despite ‘the worst recession in two centuries’, however, Stokes says AIM companies have been ‘eager to restart dividends’. He adds that although few AIM companies habitually pay dividends, ‘those that do tend to grow them faster than the main market. We are confident AIM’s dividends can regain their previous highs by some time in 2023, almost two years earlier than our expectation for the main market.’

Last week Janus Henderson reported that global dividends are predicted to rise to $1.39 tn this year – a figure that is just 3 percent below the pre-pandemic peak. In the UK, it reported overall headline growth of 60.9 percent in dividends, largely by companies restarting payments after none were made in 2020.

New rules

But the UK’s dividend recovery could be facing a snag from new pension rules set to come into force in October.

Actuary Lane Clark & Peacock (LCP) warned this week that new rules governing how UK corporates manage their cashflow liabilities could impact the rapid dividend recovery currently being seen across UK companies.

The Pensions Regulator (TPR) will gain new powers under the Pension Schemes Act 2021 from October 1. These new rules were designed to tackle some of the vulnerabilities exposed by the collapse of high-profile firms such as Carillion and BHS, but LCP says they could have wider consequences.

‘Under the new rules, company directors and others involved could face a legal challenge if a dividend payment leads to a ‘material reduction’ in the recovery that a defined benefit pension scheme can expect to get in the event of a hypothetical insolvency,’ the actuary has warned.

Where directors of companies with a direct benefit scheme wish to pay dividends, and where the direct benefit pension scheme has a deficit on the relevant measure (which LCP says most will because the relevant measure is by reference to the solvency deficit), the firm advises companies to analyze the impact of dividends on the direct benefit scheme at an early stage of discussions.

It adds that the rule ‘will be relevant’ for all corporates that sponsor direct benefit pension schemes, not just the largest FTSE 100 blue chips, and is relevant for intra-group and special dividends, as well as ongoing ‘regular’ dividends paid out to investors.’

Commenting on the upcoming rule change, Laura Amin, principal at LCP, says: ‘Government and regulators are keen to avoid a repeat of scenarios where a company goes bust leaving a hole in the pension scheme after a period when large dividends have been paid to shareholders.

‘The new powers for TPR will raise the bar on its benchmarking of dividends and may lead to more frequent regulatory intervention. We expect much debate in the early days of these new TPR powers, which come into force from October 1 this year, and it may be challenging for company directors to understand where the new boundaries lie.’

Boards will have to think ‘much more carefully’ about the impact on the pension scheme when setting their dividends, she says, adding that companies should also be prepared for greater scrutiny when paying out large dividends.

‘It’s important to note that the impact of the new powers for the regulator extends beyond dividend policy, and all company boards will now have to document how they considered the pension scheme impact across a wide range of corporate decisions (including refinancing and group restructuring),’ she concludes.