Join our community of smart investors

AlphaScreens: Covering dividend growth gets tough

Dividend cover is a test that some high yield companies struggle to meet in our screen.
May 7, 2019

Commonly failed tests in a stock screen can say something about where we are in the economic and market cycles. Our tests designed for all companies, including larger firms by market cap, in the FTSE All Share index showed several firms not passing our dividend cover test. Our screen for just small companies, which filters companies from the FTSE All Small Companies and FTSE Aim All Share indices, showed that companies were struggling to meet earnings growth forecast requirements. 

  • How a company performs against mechanical screening criteria is only ever part of the story when it comes to choosing shares. Equipment rental group Vp (VP.) might pass all our FTSE All Share dividend yield tests but it is probably one to avoid until the conclusion of an investigation by the Competition and Markets Authority (CMA) for alleged price collusion.
  • The only other company to pass all 8 tests was SSP Group (SSPG), which manages concessions for food and beverage outlets at travel hubs.
  • The test most commonly failed by companies included in the FTSE All Share index, was the requirement to have dividend payments covered twice by earnings. Tobacco firm Imperial Brands (IMB), gold and silver miner Polymetal (POLY), Domino’s Pizza (DOM) and Telecom Plus (TEP) all fall short on this measure.
  • Our small-cap dividend yield screen is more growth orientated – as we look to identify firms that are growing profits and cash flows to sustain a progressive dividend policy. Screening both the main market FTSE All Small Companies index and the FTSE Aim All Share index, we find that the growing earnings forecast test is proving the stumbling block for many companies that would otherwise score full marks.
Download PDF