Our Dividend Danger Zone screen aims to spot in advance the high-yielding shares that may not keep their income promises.
Since our Dividend Danger Zone screen was set up at the start of 2018, three victims have been claimed: Inmarsat, Stobart Group and most recently Vodafone. Each firm, for different reasons, has moved to cut its dividends. But the warning signs were there for all to see, including a high dividend yield, low dividend cover and a slowdown in dividend growth.
The screen, compiled by wealth manager Canaccord Genuity, aims to identify in advance the high-yielding shares that may not keep their income promises, by applying certain criteria.
To date, the screen has filtered for shares on the following basis: market capitalisation of over £200 million, a dividend yield of 4% (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.
But going forward, we have decided to give the screen a bit of a shake-up, in order to capture companies where there has been a notable slowdown in dividend growth that may prove unsustainable and lead to a dividend cut in the future. A slowdown could also serve as a forewarning for investors that strong levels of dividend growth in the past may not continue in future years.
We have upped the screen’s dividend yield filter to 4.5%, a reflection of the FTSE 100’s average yield being higher than when the screen was first devised. The screen also now captures shares where dividend growth is cooling, as measured by the current dividend per share growth being below a firm’s five-year historical average
The filter that excludes firms where earnings have been upgraded by analysts remains, but the dividend cover rule has been relaxed. This is in order for the screen to be more forward-looking, but as a rule of thumb those businesses that score above two times should be in a comfortable position to maintain or increase dividends in the short term.
Once these filters are applied, 12 shares remain – including Vodafone, indicating that its recent dividend cut may not have been its last. The table below shows the list in full, highlighting the current dividend yields and dividend cover scores.
|Company Name||Industry||Dividend yield||Dividend cover||Consecutive years dividend per share growth|
|Centamin||Metals and Mining||4.9%||1.0||0|
|ContourGlobal||Independent Power and Renewable Electricity Producers||5.8%||1.5||2|
|Sirius Real Estate Ltd||Real Estate Management and Development||4.6%||1.5||0|
|IG Group Holdings||Capital Markets||7.6%||1.1||3|
|TUI||Hotel Restaurants and Leisure||8.1%||1.8||6|
|Charter Court Financial Services||Financial services||4.9%||3.4||1|
|Superdry||Speciality Retail||5.40%||2 . 0||2.0|
Stock in focus: BBA
Each month in Money Observer magazine, we look more closely at an individual stock that features in the dividend danger zone. This month, we have chosen BBA Aviation.
Dividend growth has been cooling for US-focused BBA Aviation, a new entrant into our dividend danger zone screen. A slowdown in dividend growth is a new ‘red flag’ introduced into the screen. This slowdown means current payouts may prove unsustainable and lead to a dividend cut in the future. Or it may serve as a forewarning to investors that strong levels of dividend growth in the past may not continue in future years.
BBA Aviation’s current dividend per share growth is below its five-year average, the new test shares must pass to avoid being captured by our screen.
Global economic uncertainty is a headwind that BBA Aviation “is clearly geared into”, points out Simon McGarry, senior equity analyst at Canaccord Genuity Wealth Management, who compiles Money Observer’s dividend danger zone share screen. The FTSE 250 firm repairs business aircraft, among other services.
But there appear to be more positives than negatives. BBA’s 4.5% dividend yield is backed up by a dividend cover score of 1.6 times, while its recent results for the period between January 1 and April 30 reported a 23% increase in revenue, a reflection of organic growth and acquisitions completed in 2018.