According to the latest Dividend Dashboard from AJ Bell (AJB), the FTSE 100’s forecast dividend pay-out has fallen from £91 billion back in January to £62 billion this month, while earnings cover for dividends is still worryingly thin.
That reduction would represent a 17% fall in the pay-out in 2020 compared to the previous year after an 11% drop in 2019, leaving the total at its lowest level since 2014.
CUTS, CANCELLATIONS & DEFERRALS
Each quarter, AJ Bell takes FTSE 100 company forecasts from the leading City analysts and aggregates them to provide the dividend outlook for each company.
Its latest Dividend Dashboard reveals that the blue chip benchmark currently offers a 3.6% dividend yield. That is after 48 of the market’s 100 largest companies by market value have cut, deferred or cancelled a dividend payment and 49 have maintained or increased one for either fiscal 2019 or fiscal 2020.
The research shows that insurance giant Aviva (AV.), M&G (MNG), the asset manager demerged from Prudential (PRU) last year, and oil major BP (BP.) are the three highest yielders in the index - all paying in excess of 10% - although the record of companies offering juicy 10%-plus yields in actually making those payments is poor.
RECOVERY IN 2021?
Russ Mould, investment director at AJ Bell, commented: ‘The FTSE 100 is currently expected to yield 3.6% for 2020, down from the 4.7% the index was expected to yield at the beginning of the year.’
He explains that dividend forecasts for the year have slumped by a third thanks to the COVID-19 virus outbreak and dividend payments are now expected to fall for two consecutive years before beginning to forge a recovery in 2021.
As things currently stand, some 46 FTSE firms are expected to increase their dividend in 2020, with just 30 anticipated to cut them. However, the cuts tend to be much deeper and come from firms whose contribution to the overall pot is so much bigger.
In a blow to income investors, the aggregate dividend payment from the blue chip benchmark’s ranks is forecast to drop by £12.5 billion to £62.5 billion this year with just five firms responsible for the bulk of that cut.
COVER IS ‘STUBBORNLY THIN’
Understandably, dividend cover will be lower than ideal during an economic downturn as earnings come under pressure, yet today’s research also reveals that the aggregate earnings cover ratio for the FTSE 100 is just 1.4 times.
‘That equates to a 72% pay-out ratio and suggests that management teams as well as analysts and shareholders are pinning their hopes on a second-half pick-up in economic activity and therefore profits and cash flow,’ said Mould.
‘More encouragingly, analysts seem to think that boardrooms will not look to splash the cash too quickly if the good times do start to roll, as earnings are forecast to grow faster than dividends in 2021. That would allow earnings cover to start to move back towards the 2-times threshold that provides a safety buffer in the event of the unexpected - such as a pandemic, or even just a common-or-garden economic downturn.’
CONCENTRATION RISK
Concentration risk has dogged those who have sought income from the UK stock market for some years. Just ten stocks are forecast to pay dividends worth £34.1 billion, or 55% of the forecast total for 2020.
BP’s status as the biggest single payer in the FTSE 100, according to consensus forecasts, presents investors with a particular conundrum. Rival Royal Dutch Shell (RDSB) has already cut its dividend and BP has form here, having slashed its pay-out in 1992 and then again after 2010’s Gulf of Mexico oil rig disaster.
BP’s cash flow is under pressure due to falling oil and gas prices, new boss Bernard Looney's wish to reinvent the firm so it is ready for a low-carbon future, and net debt which is way higher than a decade ago.
Mould says a cut would ‘not be the biggest surprise in the world’, despite Looney’s public recognition of the importance of the dividend to shareholders.
DISCLAIMER: AJ Bell is the owner and publisher of Shares. James Crux owns shares in AJ Bell.
