Dividend cover for the 350 largest listed companies in the UK has dropped to the lowest level in three years as companies are under pressure from shareholders to sustain dividend flows.
A measure of how affordable and sustainable dividends are, dividend cover has fallen to 1.4 times from 2.3 times in 2011.
The lower the ratio, the less profit is available to pay out to shareholders.
The Share Centre, which used data from The Share Centre’s Profit Watch UK report and the Capita Asset Services UK Dividend Monitor to compile the numbers, says weak company profitability is to blame as dividends “have raced ahead”.
Based on profits of £106 billion (€127 billion) made by the 350 largest listed companies in the year to the end of March and reported by the end of June, dividend cover was just 1.4 times.
FTSE 100 companies show greater stability in dividend cover than FTSE 250 companies, The Share Centre says, with FTSE 250 companies paying out dividends even while they made collective losses during the recession.
With profits plunging, the mining sector has abandoned traditionally strong dividend cover over the last year. The Share Centre says this raises questions about dividend sustainability from that sector.
It predicts that coverage ratios should improve as economic recovery drives company profitability, though the full year 2013 is still likely to be low.
“Companies are under constant pressure from shareholders to sustain dividend flows, even under difficult economic conditions,” says Helal Miah, research investment analyst from The Share Centre.
“In some sectors, notably the mining companies, coverage ratios have become uncomfortably low, but their profits have likely bottomed out, meaning better ongoing support for dividends.”
Miah says since many companies are cash rich at present, owing to low capital investment, they can afford to keep distributions high despite lower earnings. “However, dividends cannot continue to outstrip profits indefinitely,” Miah says, noting that profits have been far more volatile than dividends.
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