Dividend Danger Zone: the shares that look like they may struggle based on a number of valuation metrics.
A total of seven shares now sit in our dividend danger zone, the highest number since the screen first started at the end of 2017.
Created by Simon McGarry, of Cannacord Genuity Wealth Management, the screen attempts to identify companies at risk of cutting their dividend payment.
All but one of the shares in the screen – Inmarsat – current offering a dividend yield of above 5%.
This underscores the risk of investors looking to higher yield companies for income. On paper, high yields are attractive to investors seeking income. However, with high yield being the result of a decline in the in the share price of a company, it is also signals trouble with the company and potential for a dividend cut.
Yield is the dividend payment an investor receivers per share, expressed as a percentage of the share price. Therefore a decline in the share price sends the yield up.
However, that decline in share price is usually the result of a company running into trouble, such as seeing (or being expected to see) a drop in profits or sales. And that trouble is likely to force the company to cut the dividend it is paying to shareholders, leading to yield to fall back to lower levels.
To help investors avoid such potential value traps, our dividend danger zone screen attempts to highlight shares that look like they may struggle based on a number of valuation metrics, see below for the methodology.
|Stock||P/E*||Dividend yield||Dividend cover|
|Analyst expectations in 12 months time|
Share in focus
The latest addition to the dividend danger zone is bookmaker William Hill. Its dividend has become more vulnerable due to a raft of new taxes and regulations, which it is estimated has cost the firm around £250 million in profit over the past six years.
However, there are other reasons for investors to be more fearful than cheerful about future profits. According to Simon McGarry, of Canaccord Genuity Wealth Management, the company is likely to see only limited success in the recently opened up US market. Following a nationwide relaxation of online sports gambling last year, America was hoped by many established British companies to be a gold mine. William Hill hoped to replicate their success in the state of Nevada. McGarry, however, believes the company will struggle to do so.
The dividend cover (the ratio of a company's net profits to dividend payouts) is just 1.2x, way below the 2x consider as safe. The share currently yields 5.1%.
The mechanics behind the share screen
The dividend danger zone screen screens UK shares 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.