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Dividend doubts: payouts hit 'questionably high' levels

Nine FTSE 100 stocks are offering yields of 7% or above, as yields across the index hit 4.4%. That's 'questionably high', says AJ Bell.

 
Dividend doubts: payouts hit 'questionably high' levels
 

Market falls may have boosted dividend yields but the sustainability of ‘juicy’ returns is becoming a real concern, particularly among housebuilders.

The latest Dividend Dashboard report from AJ Bell reveals that FTSE 100 firms are forecast to pay £87.5 billion in dividends this year, equal to a yield of 4.4% but the investment platform has warned that some yields are starting to look ‘questionably high’.

The yields have been boosted by the stock market falls in January and February. While share prices have fallen, dividend forecasts remain unchanged, pushing yields higher.

All except one of the 10 companies with the highest dividend yields in the FTSE 100 saw their share prices fall over the past year – with house builder Persimmon  being the exception.

  Forecast dividend yield 2018 Forecast divdend cover 2018
Persimmon (PSN) 9.3% 1.13x
Centrica (CNA) 8.4% 1.19x
Barratt Developments (BDEV) 8.2% 1.5x
Taylor Wimpey (TW) 8.2% 1.4x
SSE (SSE) 8% 1.27x
Imperial Brands (IMB) 7.8% 1.4x
Direct Line (DLG) 7.7% 1.08x
Micro Focus (MCRO) 7.5% 2.04x
BT (BT) 7% 1.76x
Marks & Spencer (MKS) 6.8% 1.46x
Average 7.9% 1.42x

Russ Mould, investment director at AJ Bell, said the appearance of three housebuilders in the top four highest yielders is ‘testimony to the size of their capital return programmes’ but also a warning sign

‘It may also hint at investor scepticism that the industry can maintain its current lofty levels of profitability without the benefit of government assistance, via the Help to Buy and Lifetime ISA schemes,’ he said.

The other blue chip companies that made it into the top 10 have all had a tough year, with Mould highlighting Centrica, SSE, Imperial Brands, BT, and Marks and Spencer as faring ‘particularly badly’. Management software specialist Micro Focus has been ‘catapulted’ into the top dividend payers after a halving of its shares on the back of a profit warning and the resignation of the chief executive.

‘The question now is whether these juicy looking yields are sustainable and the issue of skinny dividend cover refuses to go away,’ said Mould.

Dividend cover is the ratio of a company’s annual earnings to the amount paid out in dividends and ideally companies should have cover of around two, which means the profit is double the amount the company is paying to shareholders and payouts can continue even in a bad year.

‘Earnings cover for FTSE 100 dividends as a whole has improved slightly over the past quarter but it remains much thinner than ideal at 1.71 times for 2018 and has not reached the comfort zone of two times or more since 2014,’ he said.

He added the picture for the highest yielders was ‘significantly worse’ than average at 1.42x although none of them appeared to be in ‘immediate jeopardy’.

However, Mould said the economy was strong, interest rates on borrowing still low, and trading favourable, with the exceptions of BT, Centrica, and Micro Focus.

A safe bet?

If you’re worried about dividend sustainability, AJ Bell has also identified 26 companies that have grown their payout every year for at least the past 10 years – nine of which have grown the dividend every year for two decades.

There are 26 firms in the FTSE 100 that have grown their dividend every year for at least the past 10 years and nine of these have grown their dividend every year for the past two decades.

Company Years of dividend increases Total return March 2008 - March 2018  
Halma (HLMA)

 38

718%  
Scottish Mortgage (SMT )  34 286%  
Johnson Matthey (JMAT)  31 121%  
Vodafone (VOD)  29 129%  
SSE (SSE)  26 54%  
Bunzl (BNZL)  24 285%  
Sage (SGE)  22 378%  
Imperial Brands (IMB) 21  80%  
British American Tobacco (BATS)  20 216%  
Croda (CRDA)  19 834%  
DCC (DCC)  19 660%  
Diageo (DGE)  19 226%  
Associated British Foods (ABF)  18 246%  
Compass (CPG)  17 574%  
Paddy Power Betfair (PPB)  17 413%  
Intertek (ITRK)  15 509%  
BAE Systems (BAES)  14 97%  
Intercontinental Hotels (IHG)  14 700%  
Whitbread (WTB)  14 322%  
Ashtead (AHT)  13 4588%  
Prudential (PRU)  13 317%  
Shire (SHP)  13 212%  
Micro Focus (MCRO)  12 684%  
St James's Place (SJP)  12 546%  
Hargreave Lansdown (HRGV)  10 1335%  
Standard Life Aberdeen (SLA)  10 163%  

‘Consistent dividend growth is a key trend to look out for as it can have a very positive effect on the total return delivered by a stock,’ said Mould.

‘These calculations run from March 2008, so the great financial crisis was just starting to rip around the world a decade ago, demolishing share prices in the process, so that makes the returns generated by this grouping of names all the more noteworthy.’

He added all except energy company SSE were expected to grow their dividends both this year and next.

5 comments so far. Why not have your say?

chazza

Apr 09, 2018 at 16:13

I think Direct Line (DLG) has a policy of returning (nearly) all surplus cash in form of special dividends, so their cover may not be a thin as it appears from the first table. But I do wish I hadn't sold my HL shares years ago...

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Andrew Stevenson

Apr 09, 2018 at 18:37

" Questor: Buy Dignity – the market is overstating the threat to earnings from competitors - Russ Mould - 9 JANUARY 2018 • 8:59AM"

23 Jan 2018 Update: Dignity

" Almost as soon as this column championed Dignity, the funeral and crematorium services provider, for its strong competitive position and potential to recover from November’s profit alert, the FTSE 250 firm cut the price of its simpler funeral services by 25pc to protect market share.

As a result, analysts cut profit forecasts for 2018 in half and the shares fell by the same extent. It is difficult to emerge with any dignity from such a disaster, for which this column can only apologise."

-------------------------------------------------------

Warning: Beware anything Mr Mould says.

report this

EARLY BIRD

Apr 09, 2018 at 19:24

The article is clrearly designed to get their name promoted . ALL alternative results are covered so we learn nothing. Frankly crap !

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Roger Savage

Apr 09, 2018 at 22:44

Does it make sense that some companies appear in both tables?! This is an advertorial and a very poor one at that.

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Roger Savage

Apr 09, 2018 at 22:44

Does it make sense that some companies appear in both tables?! This is an advertorial and a very poor one at that.

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