Highest dividends ‘could be on shaky ground’
Market wobbles during February and March have pushed forecast dividend yields higher because share prices have fallen, while dividend forecasts have remained unchanged.
FTSE 100 companies are now forecast to pay out a total of £87.5 billion in dividends this year. This is equivalent to a yield of 4.4%.
However Russ Mould, investment director at AJ Bell, said that many of the top-paying companies have seen share price weakness. He added: “With the exception of Persimmon, all of the top ten firms have seen share price weakness over the past year. Centrica, SSE, Imperial Brands, BT and M&S have all fared particularly badly and the recent 50% fall in the share price of Micro Focus has catapulted it into the list of top ten yielders.
“The presence of three house builders in the top four highest yielders is testimony to the size of their capital return programmes, but it may also hint at investor scepticism that the industry can maintain its current lofty levels of profitability without the benefit of Government assistance, via the Help-to-Buy and Lifetime ISA schemes.”
The ten FTSE 100 companies forecast to have the highest dividend yield this year:
|Marks & Spencer||6.8%||1.46x|
Source: Company accounts, Digital Look, analysts’ consensus forecasts
Mould added that earnings cover – the extent to which a company’s dividend are covered by its revenues – is a source of concern. If a company’s earnings cover is low, it means that a turn down in their business activities can rapidly wipe out their dividend.
He said: “Earnings cover for FTSE 100 dividends as a whole has improved slightly over the past quarter but it remains much thinner than ideal at 1.71 times for 2018 and has not reached the comfort zone of 2.0 times or more since 2014…The picture for the highest yielding shares is significantly worse, with the average cover across the 10 highest yielding stocks in the FTSE 100 reaching 1.42 times.”
“Investors therefore need to consider whether these juicy looking dividend yields are sustainable.
There are 26 firms in the FTSE 100 that have grown their dividend every year for at least the past 10 years and nine of these have grown their dividend every year for the past two decades. The table is shown below:
|Consecutive number of years of dividend increases||Company||Total return Mar 2008– Mar 2018|
|20||British American Tobacco||216%|
|18||Associated British Foods||246%|
|17||Paddy Power Betfair||413%|
|12||St James’ Place||546%|
|10||Standard Life Aberdeen||163%|
|Average of the 26 firms||569%|
|FTSE 100 average||87%|
Source: Thomson Reuters Datastream, Company accounts.
Mould said investors should prioritise consistent dividend growth rather than necessarily the highest absolute level of dividends.