Dividend Danger Zone: our screen claims second victim

Dividend Danger Zone, our dividend watch series, has claimed its second victim since it kicked off at the start of the year. 

Dividend Danger Zone, our dividend watch series, has claimed its second victim since it kicked off at the start of the year. 

A few months after it entered our Dividend Danger Zone screen (in June), Stobart Group has cut its dividend. The infrastructure and support services company announced earlier this month that its fourth quarter dividend would be slashed to just 1.5p.

The new dividend per share is far below the 4.5p the company paid in each of the previous quarters of 2018.

However, the company’s yield per share is still around the same as before the cut, owing to an almost 20% decline in the company’s share price since. In June the company’s yield stood at 7.6%, but it is now 7%.  

Simon McGarry, of wealth manager Canaccord Genuity, previously warned about the company’s cash flow, arguing it was not generating enough excess cash.

Stobart, in announcing the cut, claimed that it was part of an “ongoing review” of its capital. By cutting the dividend, the company will be able to dedicate more cash to investing back into the business.

Russ Mould, investment director at AJ Bell, argues that the cut doesn’t necessarily mean bad news for shareholders in the long term and that dividend cuts should not be resisted at all costs.

“The decision by infrastructure services firm Stobart to trim its full year dividend could turn out to be the right one for the business and therefore ultimately for shareholders,” he notes.

Investors in Neil Woodford’s equity income fund may want to take note. Woodford owns around a fifth of the entire company. “This is an added risk, particularly given that Woodford has been seeing redemptions from his funds,” warned McGarry in back in the July edition of Money Observer.  

The mechanics behind the share screen

The dividend danger zone screen filters through the 700-odd names in the FTSE All Share index, screening on the following basis: a market cap of over £200 million, a dividend yield of 4 per cent (higher than the FTSE 100 average) and a dividend cover score of below 1.4 times. Two other filters have also been applied: the first filters out companies that appear in a financially sound position to pay off their debts, while the second excludes firms where earnings have been upgraded by analysts.

Please click here to view larger version

 

Subscribe to Money Observer Magazine

Be the first to receive expert investment news and analysis of shares, funds, regions and strategies we expect to deliver top returns, plus free access to the digital issues on your desktop or via the Money Observer App.

Subscribe now

Add new comment