Dividends in danger as FTSE 350 profits plummet
The ‘dividend cover’ of the top 350 listed UK firms, a measure which shows how affordable and sustainable company dividends are, has fallen to its lowest level since the end of the 2009 recession.
It now stands at 0.98x, down 38% in the past year, according to The Share Centre.
This means for the first time in seven years companies are paying out more in dividends than they make in profit.
Net profits of the UK’s largest firms, especially those in the basic materials, oil and gas, and financial industries have been hit hard by global headwinds including falling commodity prices and negative interest rates.
As a result, FTSE 350 profits have plunged in the past year by 54% to £76.4bn but dividend payments for the 350 have risen to £78.4bn from £71.2bn.
The Brexit vote is expected to add further pressure to companies dependent on the UK economy.
Helal Miah from The Share centre, said: “Finance directors will usually try to ride out a soft patch for profits and hold the dividend steady for as long as they prudently can. Eventually, it is important to face facts. We have already seen companies announce a slew of dividend cuts, many of which are still to filter through.”
Rio Tinto, Rolls Royce, Centrica and BHP Billiton are among the FTSE-100 giants to have slashed their dividend since the start of 2016.
Miah says investors should “expect cover to fall further” or “brace themselves for dividends to be cut”.
Despite the gloomy outlook, there have been some bright spots for income investors.
Healthcare stocks have bucked the trend, with dividend cover rising to 1.69x, an increase of 70%, driven by the pharmaceuticals sector. Although dividends barely increased, it saw net profits double to £11.5bn, largely down to the profit GlaxoSmithKline made on the sale of its oncology business to Novartis.
Stronger profit growth of mid-cap companies led to the FTSE 250 seeing higher dividend cover than the FTSE 100 – 1.56x v. 0.89x.
However, the market reaction to the EU referendum result suggests that FTSE 250 profitability will deteriorate as the economy slows.
“The recent referendum vote could favour companies with large overseas operations or big export margins, while those dependent on the UK economy can be expected to suffer,” said Miah.
“With this in mind, well-researched stock picking is all the more important to investors.”