Dividend cover doubles as profits rocket among UK plc

Rises in dividend cover ratios cause recent highs as some individual sectors soar

  • Dividend cover ratio among UK’s top 350 firms hits three year high
  • Dividend cover rises to 1.8x, up from 0.8x a year ago, as profits finally exceed payouts
  • Resurgent mining sector sees fastest rise in cover as profits recover; consumer sectors also perform well
  • Only two out of 19 sectors see dividend cover fall; property and utilities
  • Top 100 boasts stronger dividend cover than mid 250 for the first time in three years
  • Synchronized global growth to buoy profits and cover of global companies in 100, while weaker domestic economy will weigh on cover in the 250

Dividend cover for the UK’s 350 largest listed companies, a measure of how sustainable dividends are, more than doubled in the past year, according to our research.

Dividend cover has rocketed from 0.8x to 1.8x as company profits recovered among the top 350, rising far faster than dividends paid to shareholders, according to analysis of data from our Profit Watch UK report and the Link Asset Services UK Dividend Monitor. This is its highest level in three years, and marks a significant and welcome improvement on the previous two years, which have seen dividends exceed profits.

Profits reported by the UK’s top 350 listed firms over the last year shot up by a staggering 157%, rising from £67.2bn to £172.7bn. Dividends paid on those profits have increased at a much steadier rate, climbing by 10% to £93.6bn.

Dividend cover, rolling twelve months

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. This is the first time that dividend cover has been above 1.0x in over two years, meaning that companies had previously been paying out more in dividends than they generated in net profits.

Dividend cover is improving across a wider range of sectors – 17 out of 19 saw it increase. Mining companies have seen the fastest rise on the back of a sharp recovery in commodity prices coupled with the profit-boosting effect of steep cost-cutting. Their dividend cover rose from 0.4x to 3.1x, as mining profits increased from just £321m to £21.8bn in the last year. Consumer goods and housebuilding companies saw the next biggest rise, climbing to 4.5x, although this was largely driven by the large exceptional profit booked by tobacco giant BAT on its holding in Reynolds American.

Property companies saw a large fall in dividend cover, down from 3.5x to 1.9x, as their profits more than halved on the back of a slowing property market. Utility companies also saw a fall from 1.5x to 0.7x, meaning they paid out more in dividends than they made in profit. The sector’s profits fell by 22%, largely driven by a weak performance from Centrica.

Mid 250 v Top 100

Dividend cover in the top 100 exceeded that of companies in the mid-cap 250 for the first time in three years, as the UK’s largest multinational companies benefitted from an improving global economy. In the top 100, dividend cover increased to 1.9x from 0.7x a year ago. Profits increased by 181%, with big improvements from the likes of Shell, BHP Billiton, HSBC and BAT, while dividends rose by a far gentler 11%. Among mid-caps, cover climbed to 1.7x, following slower profit growth.

Helal Miah, one of our research investment analysts, said: “Rocketing profits among UK plc has driven a rapid recovery in dividend cover, much to the relief of income investors, who had justifiably begun to worry that their dividends might not be sustainable. Companies can only afford to pay more in dividends than they make in profits for a very short time. Dividend cuts follow quite quickly.

Happily, the improving global economy has put extra wind in the sails of the UK’s multinational large-caps, who also benefited from positive exchange-rate effects last year. The mining industry is a case in point, with improving global demand boosting commodity prices and profitability.

There may be headwinds ahead however. The slowing UK economy will challenge the profitability of domestically-focussed companies. We are already seeing a slowdown in the housing market and consumer spending, which likely means pain for companies dependent on these areas. A weaker domestic performance may affect the sustainability of dividends in the 250, meaning large caps are set to outperform once more.”

All information given including prices, yields and our opinion is correct at the time of publication. Our opinions on investments can change at any time and for our latest view please go to www.share.com. To understand how our Investment research team arrive at their views please read our Investment Research Policy.

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