10 high yielding shares in the FTSE 100: how safe are their dividends?

Dividend yields across the FTSE 100 are on the up, but there is concern that div

While dividend pay-outs from FTSE 100 listed companies is expected to increase, a decline in profit estimates has left dividend cover dangerously thin.

According to AJ Bell’s Dividend Dashboard report, aggregate dividend forecasts for FTSE 100 in both 2017 and 2018 are on the up. The consensus of analysts now is that dividends from the top 100 UK companies will increase by 16 per cent in 2017 and 8 per cent in 2018.

As Russ Mould, investment director at AJ Bell, notes: ‘The 50-plus FTSE 100 members to report earnings forecasts over the summer increased their dividend payments by 15 per cent between them.’ Overall, FTSE 100 is now expected to offer a dividend yield of 4.1 per cent this year, and 4.4 per cent in 2018. With Gilt yields still lingering at 1.33 per cent and savings rates remaining in the doldrums, UK stocks look an attractive investment.

Dividend cover weakens

However, warns AJ Bell, while FTSE 100 companies are increasing their payout to shareholders, many are leaving their dividend cover worryingly thin.

According to AJ Bell, analysts have started to revise downward their aggregate profit forecasts for FTSE 100 companies. Profit forecasts for such companies in 2017 have been trimmed by 3 per cent, while 2018 forecasts have remained unchanged.

As a result, aggregate dividend cover in 2017 and 2018 is now predicated to be at 1.7.

While the 1.7 dividend cover figure means that, on the whole, companies are expected to see earnings over the amount they are planning to pay out to shareholders, the figure is below the ideal dividend cover of 2.0.

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A dividend cover of 2.0 would mean that a company (or an aggregate of companies) has estimated profits of double the amount expected to be paid out to shareholders. This would give the company (or aggregate of companies) comfortable breathing space should they run into financial trouble.

Therefore, with FTSE 100 companies on an average dividend cover of 1.7, in the event of unforeseen trouble they will have less room for manoeuvre, potentially leaving companies to decide whether or not to cut dividends, delay company reinvestment or take on more debt.

Mould adds: ‘The effect of profit estimates going down and shareholder pay-out estimates going up is that earnings cover for dividends remains much thinner than ideal at barely 1.7 times for 2017 and 2018.

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‘Earnings cover needs to be around the 2.0 times mark to offer a margin of safety to dividend payments, should there be a sudden and unexpected downturn in trading at a specific company, or indeed the UK and global economies as a whole.’

Individual cover

Naturally, some companies have a much higher – and therefore more comfortable - cover than others. Among the companies with the best dividend covers are Berkeley (2.41), Anglo American (2.61) and Barratt Developments (2.51).

Of course, some of the companies with high dividend cover also have dividend yields below the FTSE 100 average. For instance, Old Mutual has a strong cover of 2.96, but its 3.8 per cent yield is below that of the FTSE 100’s 2017 aggregate of 4.1 per cent.

The reverse is also true for companies with a low cover. Direct Line offers an attractive dividend of 7.1 per cent, while its cover only 1.21. Royal Dutch Shell offers a yield of 6.6 per cent, but has a dividend cover below its actual profits, at 0.90. That means the oil producer is losing money in order to maintain its payments to shareholders.  

Companies with high yields but thin dividend cover.

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