Major income stocks including Vodafone (VOD), Tate & Lyle (TATE) and Diageo (DGE) could be the next victims on the dividend chopping board according to new research.
In the past 18 months, giants including supermarkets Tesco (TSCO) and Sainsbury (SBRY) have been joined by the under-pressure commodity behemoths Anglo American (AAL) and Glencore (GLEN) in slashing payouts to shareholders.
But now more household names could come under pressure to curb their dividends given the dividend payout ratio for the FTSE 100 is now 70 per cent, Canaccord Genuity Wealth Management has said. Simon McGarry, senior equity analyst at the wealth manager, said the era of ultra-low interest rates had "provided a strong environment for high-yielding shares", but his screen had identified some payouts that could be at risk.
"As the tide has risen, so a general 'hunt for yield' has driven such assets higher, with progressive moves further out on the risk scale, as low interest rates lasted for longer than expected," he said.
"It was Warren Buffett who famously said 'only when the tide goes out do you discover who's been swimming naked.' Now the interest rate tide is ebbing out again, we are likely to see who has been swimming naked in the dividend sea."
There had been hopes the recent meeting in Doha of the leading oil producing nations would lead to an agreement which would curb output and help push the price of oil up. But no agreement was struck, leaving the oil price and investor bruised.
"As a result of the underlying backdrop, we feel that investors should be more wary than usual of investing in stocks were a dividend cut is likely," he said. "Vigilance is the watchword."
The wealth manager used a screen to identify which stocks are likely to see their dividends under pressure. This highlighted companies with a dividend yield above 3 per cent, dividend cover of less than 1.7x, negative EPS growth last year and this year, net debt to cash profits analysis and declining cash flow returns.
Below are the stocks Canaccord Genuity WM have highlighted as being at risk of cutting dividends.
| Stocks | Market cap (£m) | Dividend yield | Dividend cover | EPS growth (last year) | EPS growth (this year) | Net debt/Ebitha | Cash flow returns change |
|---|---|---|---|---|---|---|---|
| Brammer | 237 | 5.9 | 1.5 | -21.4 | -6.4 | 2.4 | -0.8 |
| De La Rue | 494 | 5.1 | 1.5 | -6.3 | -35.1 | 1.2 | -4.1 |
| Dee Valley | 61 | 4.7 | 1.1 | -24.8 | -21.2 | 4.8 | -1.1 |
| Diageo | 48,283 | 3.2 | 1.6 | -8.5 | -7.0 | 2.9 | -2.3 |
| Electrocomponents | 1,179 | 4.3 | 1.3 | -18.6 | -7.3 | 1.6 | -1.4 |
| Fenner | 269 | 3. | 1.3 | -34.7 | -54.9 | 2.6 | -4.3 |
| Inmarsat | 4,342 | 3.9 | 1.0 | -4.1 | -19.3 | 2.7 | -2.0 |
| ITE | 374 | 5.0 | 1.5 | -27.1 | -20.5 | 1.3 | -1.4 |
| Rio Tinto | 43,270 | 3.3 | 1.3 | -32.4 | -52.3 | 1.7 | -2.0 |
| Stanley Gibbons | 29 | 18.6 | 1.1 | -0.8 | -14.1 | 1.8 | -0.9 |
| Tate & Lyle | 2,774 | 4.7 | 1.3 | -39.2 | -3.8 | 2.2 | -0.7 |
| Vedanta | 1,172 | 7.5 | -2.9 | -118.6 | -1,501.4 | 4.9 | -5.3 |
| Vesuvius | 853 | 5.2 | 1.6 | -37.2 | -6.5 | 1.9 | -0.3 |
| Vodafone | 61,443 | 5.0 | 0.5 | -52.3 | -11.6 | 2.2 | -0.6 |
| Weir | 2,645 | 3.5 | 1.4 | -13.0 | -44.4 | 3.3 | -2.7 |
