Dividend cover for the index of 350 leading shares has fallen to its lowest level since 2009, research by The Share Centre has shown.
Dividend cover is the ratio of after tax profits divided by the dividends paid. If the ratio is high people can be confident that the company in question will be able to afford its dividend payouts. If the ratio is low it means that further falls in profits could signal a cut in dividends.
The analysis shows that the UK’s top 350 listed firms posted profits of £102.8 billion in the year ending March 2015. During this time, dividend cover fell from 1.5x to 1.2x, which is its lowest level since it hit 0.7x in 2009.
The fall is attributed to a number of factors that have affected the net profits of the UK’s largest companies:
- currency price fluctuations
- commodity price falls
- supermarket price wars.
The story is not uniform across different sectors. While the dividend cover for oil and gas firms fell to 0.7x due to a 65% drop in annual net profits compared to last year, the technology and financial sectors saw their covers rise to 1.6x and 1.7x respectively.
Supermarkets have seen big drops in dividend cover, with the largest payer in the sector cancelling its annual dividend payouts.
Helal Miah, research investment analyst at The Share Centre, said:
“Dividends are much less volatile than profits. Shareholders keep up the pressure on managers to sustain annual payouts, even in the face of falling profits.
“Commodity price falls, currency swings, slowing global growth and, most recently, supermarket price wars have hit profitability in the FTSE 100. In turn, dividend cover has been stretched, with the majority of companies maintaining or expanding their payouts to shareholders, despite margins being squeezed.
“For the UK’s listed companies as a whole, we believe balance sheets are strong enough to allow dividends to continue to grow, even if profitability takes time to recover, but high profile dividend cuts at some of Britain’s famous corporate names demonstrate that investors cannot take dividend growth at individual companies for granted.”
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