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FTSE dividend cover hits financial crisis lows

AJ Bell has warned a lack of dividend cover could put income seekers in a precarious position next year.

 
FTSE dividend cover hits financial crisis lows
 

Stocks are entering the new year offering increased dividends but ‘skinny’ dividend cover among the likes of Centrica (CNA) should make investors wary, says AJ Bell.

The FTSE 100 is forecast to pay out £88.5 billion in dividends next year, a 7% increase on this year and equal to a yield of 4.3% but despite the increases, dividend cover has fallen to worrying levels.

Dividend cover, a ratio of the company’s annual earnings to the amount paid out in dividends, is just 1.63 for the FTSE 100, lower than it was at the height of the financial crisis a decade ago, according to the AJ Bell Dividend Dashboard.

Russ Mould, investment director at AJ Bell, said dividend was cover was ‘thinner than ideal’.

‘The issue of skinny dividend cover refuses to go away,’ he said. ‘Ideally earnings cover needs to be around the two level to offer a margin of safety to dividend payments should there be a sudden and unexpected downturn in trading at a specific company, or indeed the UK and global economies as a whole.’

Without decent dividend cover, companies are forced to cut payouts once they hit times of stress. Mould pointed to educational publisher Pearson (PSON) and doorstep lender Provident Financial (PFG), which were both forced to cut dividends this year.

‘Some of the companies with the juiciest looking dividend yields have dividend cover that looks particularly malnourished,’ said Mould.

The 10 companies forecast to be the highest yielding next year have an average dividend cover for 2018 of 1.37, up slightly from 1.20 seen this year.

Mould said Shell’s slide out of the top 10 yielders, ‘for the pure and simple reason that its shares have done well’, and the prominence of house builders - which are cash rich - means cover has improved.

The highest yielder, Centrica, which is offering an 8% yield, has a dividend cover of just 1.24 and Mould warned ‘the presence of Centrica and recent share price action suggests the spectre of dividend cuts still lurks’.

BP (BP) has the worst cover in the top 10 yielders list, with less than 1. Telecoms giant BT (BT) has the best cover in the top 10 list at 1.73, still under the ideal level of 2.

  Dividend yield 2018 Dividend cover 2018
Centrica (CNA) 8% 1.24
Direct Line (DLG) 7.7% 1.12
Taylor Wimpey (TW) 7.6% 1.41
SSE (SSE) 7.2% 1.26
Barratt Developments (BDEV) 7.1% 1.49
Lloyds (LLOY) 6.8% 1.62
BT (BT) 6.2% 1.73
GlaxoSmithKline (GSK) 6.2% 1.35
Legal & General (LGEN) 6.2% 1.52
BP (BP) 6.1% 0.99
Average   1.37

 

According to AJ Bell’s research, income seekers will be turning to banks and insurers next year as they are forecast to drive nearly half of the FTSE 100’s dividend growth in 2018.

Consumer staples, such as tobacco and food retailers, as well as consumer discretionary stocks like Sky (SKY), are expected to increase payouts.

The bulk of dividend payments from the FTSE 100 come from a relatively small pool of companies, with the top 10 dividend payers on their own expected to make up 55% of the total shareholder payouts next year.

‘Income-seekers, and especially those investors who are looking to draw dividends from the UK market by buying a passive tracker fund or ETF, need to consider that just 10 stocks represent 55% of forecast FTSE 100 dividend payments for 2017,’ said Mould.

He added that a sustained spell for oil above $60 a barrel would boost the oil majors’ profits and cashflow and support ‘their meaty dividends‘.

2 comments so far. Why not have your say?

Stephen B.

Dec 23, 2017 at 12:36

In the current financial year my investment income is already more than in the whole of 2014/15, so it won't be a huge disaster if it flattens out next year. The biggest issue is probably the level of sterling, if the pound were to strengthen a lot that would reduce income more-or-less across the board.

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John Griffiths

Dec 30, 2017 at 11:34

Adequate cover for dividends is the accountancy equivalent of what every schoolboy knows! How can these companies be so confident ? Only if they have made some provisions against the known problems they expect to face in the next financial year. What about the unknowns?????

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