AIM – firing on all cylinders

Kit Atkinson
01 November 2021

It is quite an exciting time for the UK’s fledgling market. The index of leading AIM stocks had bounced back 105% by mid-September to its highest level in over 20 years since the low point plumbed in March 2020 as the pandemic swept the world. This took the combined value of AIM to a record £137.2bn spread across 750 companies.

It’s not just about share prices. New issuance of £1.1bn in the first eight months of 202 was already more than 2019 and 2020 combined, while further issuance is on track for its best year in a decade. Unlike 2020, when companies raised new equity to shore up balance sheets in the face of the pandemic, 2021 is more about securing growth capital. Energy company Kistos was just such an example earlier this year, securing finance to acquire Tulip Energy.

The number of IPOs also shows the UK’s fledgling market has a real spring in its step. The first eight months of the year have seen 40 IPOs on AIM, including the successful launch of electronic monitoring company Big Technologies Plc, which Link helped bring to the market in July. By mid-September, its share price had risen by more than three quarters. 2021 looks set to be the biggest year for IPOs since at least 2017 by the time the year is out.

Dividend-paying is much less common among AIM companies than among their main-market counterparts, simply because they tend to be less mature companies still needing capital for growth. In a normal year, only a third of companies pay dividends. But AIM nevertheless presents interesting opportunities for income investors. Our recent annual AIM Dividend Monitor, the sister publication to our quarterly main-market UK Dividend Monitor, shows that AIM payouts held up relatively well during the first year or so of the pandemic and are now recovering strongly.

Small, faster-growing companies tend to be more vulnerable to economic disruption than their multi-national counterparts. They benefit far less from diversification either geographically or by business line. And crucially, they have much more limited access to funding. During 2020, underlying AIM payouts fell to £753m, a little below our £769m best-case forecast. This equated to a 39.4% decline, only slightly worse than the main market. Two thirds of AIM companies that usually pay a dividend cut or cancelled their payouts in response to the pandemic. This too was in line with the wider market. All this meant that AIM’s dividends fell back to their lowest level since mid-2016, but the main market saw them drop to a level last seen in 2011. The size of these declines says more about the main market than it does about AIM, however.

The five largest dividend payers in the UK typically contribute over a third of all UK dividends, but on AIM the top five are only responsible for 17%. This main-market concentration proved costly when four of 2019’s top payers cut or cancelled dividends, together accounting for more than two fifths of the UK plc’s pandemic cuts. On AIM, by contrast, the impact from the top five was simply in line with their smaller peers. All much less dramatic.

The current picture is rather exciting. The AIM dividend rebound now taking place is easily outpacing the main market. In the first half of 2021, payouts jumped 19.5% on an underlying basis (excluding one-off specials) compared to 8.0% on the main market. We expect the second half of 2021 to see AIM dividends rise 24.2% on an underlying basis, taking the full-year total back up to £918m, in line with the 2018 level. Large one-off special dividends mean the headline total will jump by a third to £1,076m. AIM payouts should regain their pre-pandemic highs by 2023, up to two years faster than the main market.

There’s no doubt that many AIM companies have felt the chill wind of Covid-19 - dividends rightly take a back seat in tough times - but we are very encouraged at how quickly the recovery is taking place. This recovery and the promising outlook for the next couple of years is a testament to the creative power of so many AIM companies to adapt and survive a once-in-a-century crisis and come out of it thriving.