Dividend cover among FTSE 100 companies looks “thin” while the concentration of payouts to investors remains high, according to the latest edition of the AJ Bell Dividend Dashboard.
The quarterly dashboard, which takes the forecasts for the FTSE 100 companies from leading City analysts and aggregates them to provide the dividend outlook for each company, does contain a degree of good news for income investors.
It shows that analysts are still lifting their aggregate dividend forecasts for the FTSE 100 for both this year and next, with the consensus suggesting a 16 per cent increase in 2017 and an 8 per cent rise in the following year. This would take total payouts to £85.3bn next year and £91.6bn in 2018.
Russ Mould, investment director at AJ Bell, said: “The interim reporting season backed up this optimism. The 50-plus FTSE 100 members to report earnings forecasts over the summer increased their dividend payments by 15 per cent between them.
“The resulting forecast yield of over 4 per cent is way better than anything that can be earned on cash or the benchmark 10-year government gilt yield of 1.33 per cent and therefore a potential source of support for UK stocks.”
FTSE 100 earnings cover for dividends
Source: AJ Bell Dividend Dashboard, company accounts, Digital Look, analysts’ consensus forecasts
However, Mould also highlighted the bad news found in the report. “Analysts have started to cut rather than increase their aggregate profit forecasts for the FTSE 100, trimming 3 per cent off their forecast for 2017 to £191bn and leaving 2018 forecasts unchanged at £213bn,” he said.
“The effect of profit estimates going down and shareholder payout estimates going up is that earnings cover for dividends remains much thinner than ideal at barely 1.7 times for 2017 and 2018.
“Earnings cover needs to be around the 2.0 times mark 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.”
Mould gave Pearson and Provident Financial as examples of what can happen when profits fall at companies with “juicy yields” but limited dividend cover. For those who have forgotten, both companies have endured significant share price falls this year after issuing profit warnings.
“Indeed, some of the companies with the juiciest looking dividend yields have dividend cover that looks particularly skinny,” the investment director continued. “Although that figure is dragged down by Shell and BP, only one company – Lloyds – has dividend cover anywhere near the 2.0 times comfort level.”
Source: AJ Bell Dividend Dashboard, company accounts, Digital Look, analysts’ consensus forecasts
Income investors – and especially those who are looking to using an index tracker as a source of dividends – need to be aware that just 10 companies are behind 58 per cent of the FTSE 100 forecasted dividends for 2017.
Royal Dutch Shell is expected to pay 14 per cent of the FTSE 100’s 2017 dividends, while for HSBC it’s 9 per cent, for BP it’s 7 per cent and both British American Tobacco and GlaxoSmithKline have a 5 per cent forecast.
Unilever, Rio Tinto and Vodafone are each expected to pay 4 per cent of the index’s total payouts while Lloyds Banking Group and AstraZeneca are tipped for 3 per cent each.
On a sector level, financials, oil majors and miners are forecast to produce 51 per cent of dividend payments between them (21 per cent coming from financials and oil & gas with the remaining 9 per cent from miners). These three sectors are also expected to account for 71 per cent of the index’s dividend growth this year (38 per cent miners, 25 per cent from financials and 8 per cent from oil & gas).
“A further increase in the oil price, beyond $55 a barrel, would therefore be a welcome development as it would help to boost the oil major’s profits and cashflow,” Mould added. “Sustained strength in metals prices would also be helpful, as the miners are generating nearly half of the forecast dividend increase in sterling terms for 2017, while banks and insurers are also key contributors.”
The AJ Bell Dividend Dashboard does contain a final bit of positive news, however, by listing the FTSE 100’s ‘dividend heroes’, or the stocks that have grown their dividend every year for at least the past decade.
There are 26 names on the list, which is topped by investment trust Scottish Mortgage. The trust, which is popular with both professional and private investors, has lifted its payout in each of the past 34 years.
“This makes a strong case for the investment trust model, as they are allowed to store up to 15 per cent of their annual income on their balance sheet and use these so-called reserves to pay and boost dividends when markets are falling or going nowhere fast,” Mould said.
Source: AJ Bell Dividend Dashboard, Thomson Reuters Datastream
Managed by James Anderson with Tom Slater as deputy, the £5.8bn trust invests in global companies that are expected to revolutionise established industries by using new technologies and techniques to compete with incumbents. It counts Amazon, Tesla and Tencent as top holdings.
“Of the other firms with the longest streaks, it is noticeable that none of them necessarily do anything that it seen as exciting or provide go-go growth,” the investment director continued.
“SSE is a utility, BAT is a tobacco giant, Sage provides accounting and payroll software and Bunzl distributes essential items to other companies, ranging from mops to syringes to coffee cups.
“Yet all of them have a strong competitive position, a debt pile which is suitable for their type of business and good profit margins, which mean they can throw out plenty of cash flow – and good cashflow can mean good and growing dividends.”