Profits fail to match payouts to shareholders, as UK plc dividend cover hits seven year low.
UK plc dividend cover hits seven year low
- Dividend cover ratio among UK’s top 350 companies falls to just below 0.8x, down 18% year on year
- Dividends higher than profits for five consecutive quarters – the longest period in at least eight years
- Oil companies drag on dividend cover in the 350, while banks’ dividends exceed profits
- Consumer sectors see improvement
- 250 boasts stronger dividend cover than top 100, but still sees deterioration
- Slowing UK economy will weigh on UK companies’ dividends, but global outlook should benefit top 100
Dividend cover for UK’s largest listed companies, a measure of how sustainable dividends are, is at its lowest level since 2009, according to our new research.
The analysis, using data from our Profit Watch UK report and the Capita Asset Services UK Dividend Monitor, shows that dividend cover has fallen by 18% in the past year, dropping to 0.80x from 0.97x as companies increase dividends, but fail to grow profits at the bottom line.
Profits made by the UK’s top 350 listed firms in the year to the end of December 2016 and reported by the end of March 2017, have fallen 7.6% £67.3bn. In contrast, over the same period, dividends for the same companies have increased 7.1% to £81.1bn. This is the second year in a row that dividend cover has weakened.
Dividend cover is the ratio produced by dividing profit after tax by the dividends paid out to shareholders. A higher ratio suggests dividends are more sustainable and affordable for companies. When dividends exceed profits, the ratio is below 1, highlighting the unsustainability of dividend payouts. Dividends have now exceeded profits for five consecutive quarters, the longest such run since at least 2008. Cover is also less than half the level seen just two years ago.
Falling dividend cover has been broadly spread, with a drop in two thirds of sectors in the last year.
Oil and gas companies are the largest dividend payers in the UK. Even though the sector has returned to profit, increasing cover, it is still paying out five times more in dividends than it is making in profits, with a dividend cover of 0.2x. Miners, too, saw an improving picture, returning to profit following the boost from a devalued pound and lower asset write-downs. However, at 0.1x cover, annual dividends still exceed profits by a factor of 10x. Financial services companies, which account for nearly a quarter of all dividends in the UK, have seen cover fall to 0.8x. Banks, a key component of this group, have seen cover fall from 0.5x to 0x; dividend payouts increased but RBS and HSBC held the sectors’ profits back.
Consumer-orientated sectors were among the outstanding performers, following strong domestic demand. Food and general retailers saw earnings exceed payouts (1.6x), while cover also increased in the motor sector.
Mid 250 v Top 100
Dividend cover weakened more severely in the mid-cap 250 than among the top 100. In the 250, dividend payouts increased by 3%, in spite of a 16% fall in net profits. This has driven dividend cover down to 1.2x, its lowest level since the recession. Even at this low level, 250 firms still have stronger dividend cover than in the 100. Among large caps, profits fell more gently (11%), but dividends increased quickly (8%). Their cover also fell, therefore, to 0.7x as payouts exceeded net profits for the second year in a row.
Helal Miah, our research investment analyst, said: “Dividend cover is still weakening, and this will ring alarm bells for income investors, especially as the outlook for the UK economy is moderating.
Consumer spending is down, manufacturing growth is slowing, and the housing market is slowing. For domestically orientated companies, especially those in the 250, this will impact sales and profits, and is likely to weigh on dividends.
What’s more, the Pensions Regulator has indicated it is willing to intervene should companies with pension deficits prioritise returning capital to shareholders over plugging funding gaps. This may encourage a more conservative approach to payouts. Investors would clearly prefer to see cover improve due to rising profits, rather than falling dividends.
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