Div­i­dends at high­est risk of cuts in 7 years

The Daily Telegraph - Your Money - - YOUR MONEY -

Com­pa­nies paid out a record £33.3bn in div­i­dends in the sec­ond quar­ter of 2017 – but are the pay­outs sus­tain­able? One ma­jor fac­tor that has driven up div­i­dends is the weak­ened pound, as dol­lar and euro pay­outs have been con­verted into ster­ling at a much more favourable rate.

The head­line fig­ure also in­cludes “spe­cial” pay­ments of £4.6bn, ac­cord­ing to data from con­sul­tancy Capita. Th­ese gen­er­ally rep­re­sent one- off re­turns of cap­i­tal to share­hold­ers, typ­i­cally linked to a firm’s re­struc­tur­ing or sale of an as­set. For in­stance, Na­tional Grid re­turned £3.2bn to share­hold­ers af­ter sell­ing a ma­jor­ity stake in its gas net­work.

The £33.3bn rep­re­sented a 14.5pc in­crease on the same quar­ter last year. Around two per­cent­age points of that was ac­counted for by spe­cial pay­ments, and seven per­cent­age points by the weak­ened pound. That still sug­gests sig­nif­i­cant un­der­ly­ing div­i­dend growth.

How­ever, com­pa­nies’ man­age­ments can de­cide to make div­i­dend pay­ments even where there is in­ad­e­quate profit growth to sup­port them: they could pay div­i­dends from funds oth­er­wise ear­marked for in­vest­ment in the busi­ness, or they could even bor­row in or­der to pay div­i­dends.

And the sus­tain­abil­ity of th­ese pay­ments is in ques­tion.

Re­search from in­vest­ment shop the Share Cen­tre re­veals that the av­er­age div­i­dend cover – the ra­tio of prof­its to div­i­dend pay­ments – of Bri­tain’s largest 350 com­pa­nies has fallen to just 0.8, a seven-year low.

Typ­i­cally, div­i­dend cover of two or more is con­sid­ered de­sir­able for div­i­dends to be deemed se­cure. A stock with cover of less than 1.5 is seen as be­ing at risk of a div­i­dend cut. Look­ing at 2016 prof­its re­ported by March 2017, the re­search found that the prof­its across the 350 com­pa­nies fell by 7.6pc com­pared to the pre­vi­ous year. Over the same pe­riod, firms in­creased their div­i­dend pay­outs by 7.1pc. This had the ef­fect of re­duc­ing div­i­dend cover from 0.97 to 0.8.

Oil and min­ing com­pa­nies have played a ma­jor part in this. Oil stocks, such as BP and Shell, are the UK’s largest div­i­dend pay­ers, and did not cut their div­i­dends de­spite the pres­sures of the oil price crash. Now, de­spite re­turn­ing to profit thanks to the re­cov­er­ing oil price and ef­fi­ciency drives, they are still pay­ing out many times that profit in div­i­dends.

The FTSE 250, which has a higher pro­por­tion of smaller com­pa­nies, has a more promis­ing cover level of 1.2, ac­cord­ing to the re­search, but has seen a larger fall in this cover. Div­i­dend pay­outs among th­ese com­pa­nies have in­creased by 3pc, de­spite a 16pc fall in net prof­its.

Some sec­tors of the UK mar­ket are more at risk of a cut than oth­ers.

The tele­coms, min­ing and oil sec­tors have div­i­dend cover of less than 0.5. Bank, fi­nan­cial, health­care, phar­ma­ceu­ti­cal, in­dus­trial and in­for­ma­tion tech­nol­ogy com­pa­nies all av­er­age div­i­dend cover of less than one. That means among those sec­tors, com­pa­nies are pay­ing div­i­dends through means other than prof­its – whether us­ing up cash re­serves, sell­ing off as­sets or tak­ing on debt.

The most se­cure sec­tors are house­builders, con­sumer ser­vices, and util­ity stocks, all of which have div­i­dend cover of 1.5 or above.

Some in­di­vid­ual com­pa­nies ap­pear par­tic­u­larly at risk. For in­stance, FTSE 100 re­tailer Marks & Spencer has a div­i­dend yield of 5.7pc, but cover of just 0.38, ac­cord­ing to screen­ing ser­vice Stock­o­pe­dia.

The brand’s cloth­ing lines have been strug­gling, and a re­struc­ture has hit prof­its. No div­i­dend cut has been men­tioned, but it has a track record of cut­ting pay­outs – as hap­pened in 2000 and 2009.

Out of the 19 FTSE 100 stocks yield­ing more than 4.5pc, only two have cover greater than 1.5 – the min­i­mum thresh­old for a div­i­dend to be con­sid­ered se­cure,

He­lal Miah, of the Share Cen­tre, said: “Div­i­dend cover is still weak­en­ing, and this should ring alarm bells for in­come in­vestors, es­pe­cially as the out­look for the Bri­tish econ­omy is de­clin­ing.

“Con­sumer spend­ing is down, man­u­fac­tur­ing growth is slow­ing, and the hous­ing mar­ket is slow­ing. For do­mes­ti­cally- ori­en­tated com­pa­nies, this will im­pact prof­its, which will likely weigh on div­i­dends.”

How­ever, he added that the UK’s 100 largest com­pa­nies are show­ing signs of im­prov­ing prof­itabil­ity, com­mod­ity prices have in­creased, and global growth is strength­en­ing – all of which should fil­ter through to re­sult in larger prof­its.

Re­duc­tions now more likely than at any point since 2010, says James Con­ning­ton

Newspapers in English

Newspapers from UK

© PressReader. All rights reserved.