FTSE 100 dividend cover looks thin for 2017

To compile the report AJ Bell takes the forecasts for the FTSE 100 companies from all the leading city analysts and aggregates them to provide the dividend outlook for each company.  The report is attached and the highlights are:

• The FTSE 100 is forecast to pay out £78.4 billion in dividends in 2017 (£4.6 billion higher than 2016 forecasts)

• This equates to a yield of 4.2%

• Dividend cover looks low at just 1.46 times

• Half of the dividends from the FTSE 100 (£39 billion) are forecast to be paid out by just 7 companies

• Taylor Wimpey is due to be the single highest paying stock next year

• The ten companies that are forecast to have the highest dividend yields have aggregate dividend cover of just 1.17 times (see table 1 below)

• 26 FTSE 100 firms that are forecast to have dividend cover of 1.5 times or less (see table 2 below)

• Half of FTSE 100 dividend growth is forecast to come from just 7 firms (see table 3)

• Only easyJet is currently expected to offer a lower dividend in 2017 than 2016

• 17 FTSE 100 firms are forecast to yield in excess of 3% in 2017 that also have dividend cover of over 2.0 (see table 4 below)

• AJ Bell’s UK equity income fund picks for 2017

Russ Mould, investment director at AJ Bell, comments:

“Dividends have accounted for 74% of total returns from the FTSE 100 over the past 30 years. They are therefore an important consideration for all investors when choosing which companies to invest in, particularly those looking to generate an income from their portfolio.

“With income being such an important consideration for many investors, particularly those in retirement, it can be tempting to simply seek out the stocks that are forecast to pay the highest dividend yield.  However, it is important to also assess whether the dividend yield is sustainable by looking at dividend cover and whether the dividend is growing.

“Dividend cover is the amount of profit a firm makes divided by the dividend it pays out to shareholders. 

“Divided cover of below 1.0 should ring alarm bells because it means the company is paying out more to shareholders than it makes in that year. This means it has to dip into cash reserves, sell assets or borrow money to maintain the payment.  This is unlikely to be sustainable over the long term. 

“Dividend cover of around 1.5 is less than ideal because it means a company has less room for manoeuvre if profits fall in one year.  It will then need to decide whether to reduce its dividend, stop reinvesting in the business or take on more debt.

“Dividend cover of 2.0 or above is ideal because it means profit is double the amount the company is paying out to shareholders.  This means it can continue to invest in the business and has scope to maintain its dividend payment in a bad year.

“The good news is that there are 17 FTSE 100 firms that are forecast to yield in excess of 3% in 2017 (based on their current share price) that also have dividend cover of over 2.0.  EasyJet is the only one of these that is not forecast to grow its dividend in 2017, having just pushed through a dividend cut for 2016. Capita’s share price also suggests the market is not convinced that its forecasts are entirely reliable and two profit warnings do question whether the 5.9% yield is sustainable, although cover looks good at 2.1x, based on consensus forecasts.

“The switch at FTSE 250 house builder Berkeley from paying special dividends to a possible mix of dividends and share buybacks also means the juicy yields on offer at Taylor Wimpey and Barratt – both among three highest in the FTSE 100 – will come in for additional scrutiny, even if their balance sheets look very sound.”

UK equity income fund picks for 2017

For investors not comfortable investing in direct equities, collective investment funds can be a good way of giving diversified exposure to a broad range of dividend paying companies chosen by an experienced fund manager.

Ryan Hughes, head of fund selection at AJ Bell, suggests four funds that income seeking investors could consider:

Artemis Income – 4.3% yield

“This fund has been one of the most consistent funds in the equity income sector over the past decade with experienced fund manager Adrian Frost expertly navigating almost everything markets have thrown at him over this period. The fund is well diversified and looks to produce a rising income ensuring that it focuses on companies that offer dividend growth rather than just an outright high yield.”

Woodford Equity Income – 3.5% yield

“Managed by one of the most successful fund managers in the UK over the past 20 years, Neil Woodford needs little introduction. His long term approach and comfort in not following the herd has been instrumental in his success and this has also allowed him to allocate to small and unquoted companies with a level of patience lacking from so many of his peers.”

Invesco Perpetual High Income – 3.3% yield

“Following in the footsteps of Neil Woodford is no easy task but Mark Barnett has managed to successfully do just that since he took over management of the High Income fund. Through a focus on large, higher yielding companies, Mark has delivered strong long term performance with a consistently high income. In addition, Mark is comfortable looking outside of the UK to further diversify the portfolio if appropriate.”

Montanaro UK Income – 3.6% yield

“For someone interested in looking away from the large companies, smaller companies in the UK offer good levels of income, often with decent dividend cover. One way to access this is through the Montanaro UK Income fund which is run by one of the largest independent dedicated small cap teams in Europe. With a simple approach that focuses on high quality companies that are growing and managed by strong management teams this fund offers an interesting way to generate income for your portfolio from a very different part of the market.”

Table 1 – FTSE 100 top ten forecast dividend yields in 2017:

Table 2 - Dividend danger zone – FTSE 100 firms that are forecast to have dividend cover of 1.5 times or less in 2017:

Table 3 - Half of the FTSE 100 dividend growth is forecast to come from just 7 firms:

Table 4 - 17 FTSE 100 firms that are forecast to yield in excess of 3% in 2017 that also have dividend cover of over 2.0: