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Highest dividends ‘could be on shaky ground’

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Some of the highest forecast dividend yields for FTSE 100 copmanies are starting to look ‘questionably high’ according to AJ Bell’s latest Dividend Dashboard report.

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:

Forecast dividend

yield 2018

Forecast dividend

cover 2018

Persimmon 9.3% 1.13x
Centrica 8.4% 1.19x
Barratt Developments 8.2% 1.50x
Taylor Wimpey 8.2% 1.40x
SSE 8.0% 1.27x
Imperial Brands 7.8% 1.40x
Direct Line 7.7% 1.08x
Micro Focus 7.5% 2.04x
BT 7.0% 1.76x
Marks & Spencer 6.8% 1.46x
Average 7.9%  1.42 x

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
38 Halma 718%
34 Scottish Mortgage 386%
31 Johnson Matthey 121%
29 Vodafone 129%
26 SSE 54%
24 Bunzl 285%
22 Sage 378%
21 Imperial Brands 80%
20 British American Tobacco 216%
19 Croda 834%
19 DCC 660%
19 Diageo 226%
18 Associated British Foods 246%
17 Compass 574%
17 Paddy Power Betfair 413%
15 Intertek 509%
14 BAE Systems 97%
14 InterContinental Hotels 700%
14 Whitbread 322%
13 Ashtead 4588%
13 Prudential 317%
13 Shire 212%
12 Micro Focus 684%
12 St James’ Place 546%
10 Hargreaves Lansdown 1335%
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.


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