A rise in dividend cuts looks likely: 12 shares that look vulnerable

As is always the case in times of an economic slowdown, companies with weak financial positions feel the effects first.

Around the world economic output is in decline owing to the outbreak of coronavirus. With less economic activity, most companies are looking at diminished revenues. As a result, investors should expect dividend cuts over the coming year. Below, we take a look at some of the companies on the Dividend Danger Zone screen.

Before the outbreak of coronavirus, Cineworld was already in a relatively vulnerable financial position and had made an appearance on our screen. As Simon McGarry, senior equity analyst at Canaccord Genuity Wealth Management, notes the company is highly leveraged. He says: “It has a large amount of financial leverage due to a big debt pile.”

However, as is always the case in times of an economic slowdown, companies with weak financial positions feel the effects first. Being so highly leveraged, even a small drop in revenue can have a significant impact on the Cineworld’s operating profit. The arrival of coronavirus, therefore, poses an enhanced threat. As McGarry notes: “One broker has calculated that if they were forced to close their US cinemas, the business has enough cash to survive for just four months.”

He adds that while the company has not yet seen an impact on trading due to the virus, “with movies such as James Bond and Peter Rabbit 2 recently being pushed back to later in the year, this may change”.

Ultimately, says McGarry, “if US cinema attendance starts to deteriorate, we expect the dividend to be the first thing to go”.

With the company’s share price taking a tumble, it now sits on a yield of 14%. Its dividend cover sits at 1.4x. In January, its yield was 6.5%.

Another new addition to the list is BP. The company has seen its share price fall by around 50% since the start of the year owing to a historic crash in the price of oil. The company is now on dividend yield of 10.3% with cover of just 1x. With a loss of revenue owing to the crash in oil prices, a dividend cut is now on the cards.

BP is not the only energy company on the list. Diversified Oil & Gas has been a regular on the Dividend Danger Zone screen. With recent oil price falls, however, the company’s dividend now looks even more at risk. Back in January, Diversified Oil & Gas had a dividend cover of 1.2x and a yield for around 10%. It now yields 15.9% with a cover of just 1x.

A slowdown in global growth has also made the risk of a dividend cut at Glencore more likely. In January, we flagged the company as potentially facing a dividend cut. As McGarry noted at the time, the company was facing an investigation by US authorities, which is looking into the company’s dealings in Venezuela, Nigeria and the Democratic Republic of Congo, putting downward pressure on the company’s share price.

At the same time, McGarry said that Glencore was in a weaker financial position compared to its competitors. He noted: “Glencore has much more debt than peers such as BHP and Rio Tinto.”

However, with an expected fall in demand owing to the coronavirus-induced economic slowdown, the company has come under further pressure. It now sits on a yield of 8.8%, up from 5.3% in January. Meanwhile, its dividend cover is 1.2x, down from 1.4x.

How does the screen work?

The screen, compiled by wealth manager Canaccord Genuity in partnership with Money Observer, aims to identify in advance the high-yielding shares that may not keep their income promises, by applying certain criteria.

To be picked up by the screen, a company must have a market capitalisation of over £200 million, a dividend yield of 4.5% (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.

We also recently applied 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. The filter we use is to capture shares that have a current dividend per share growth that’s below the firm’s five-year historical average.

The final filter we use is to exclude firms where earnings have been upgraded by analysts.

All in all, once all these metrics and filters have been applied 12 shares (at the start of March 2020) remain, and as a result their dividends look potentially at risk.

We do not factor in dividend cover, as we want the screen to be as forward-looking as possible, 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.

Share Sector Dividend Yield Dividend Cover
Imperial Brands Tobacco 14.30% 1.3
Royal Dutch Oil & Gas 11.10% 1.2
WPP Media 9.30% 1.4
Essentra Chemicals 6.30% 1.1
BP Oil & Gas 10.30% 1
John Wood Group Oil Equipment and Services 10.80% 1.4
Signature Aviation Transportation Infrastructure 5.30% 1.3
Hammerson Equity Real Estate 9.80% 1.2
ContourGlobal Power Generation 7.60% 1.2
Glencore Metals and Mining 8.80% 1.2
Cineworld Entertainment 14% 1.4
Diversfied Oil & Gas Oil & Gas 15.90% 1

 

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Comments

Dividend cuts

...and M&S have chopped their final payment !

Oil and Gas

Are the Saudis and Russians likely to come to an agreement soon? It must be hurting them both.

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