Must changing businesses change their dividends?

Investors get used to where the best sources of income are, but business dynamics change and with that the levels and reliability of dividend distributions.

Apax Global Alpha (APAX) – an interesting investment fund that allows retail investors to invest in the booming private equity market, usually the preserve of pension funds, sovereign wealth and hedge funds. The fund targets 20 per cent total annual return, of which 5 per cent arises from the dividend. Unusually, the dividend is set at 5 per cent of net asset value (NAV) and is not connected to annual profits: with the core fund NAV unlikely to decline, distributions look stable (if unpredictable) with the added spice of high, but likely lumpy PE-style capital returns. 

CMC Markets (CMCX) – the Covid-19 pandemic created a strong market environment for online trading of contracts for difference (CFDs) allowing CMC to post strong growth in FY2021. However, these conditions have not been sustained. As market volatility drops, profits are expected to step back this year by >40 per cent. The dividend is a mechanical 50 per cent of post-tax profits, so last year’s bumper dividend is forecast to fall in line with earnings and analysts do not appear especially bullish on growth prospects beyond 2022. 

SSE (SSE) – once a fairly standard utility business, SSE is pursuing an aggressive green conversion agenda. The shares have already shifted from a flat price trend (with total returns only derived from the dividend) to delivering  total returns of more than 20 per cent per annum since 2019. SSE feels to be transitioning via green investments and targeted disposals into more of a growth stock which could be a threat to a once reliable dividend, although RPI linked distributions are promised through to 2023. High debt and low cover by earnings per share (EPS) and free cash flow compound this view.