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Global dividend cover to hit 10-year low

Rising profits have not kept pace with corporate payouts
October 23, 2019

UK dividend cover ranked third lowest in the world among major markets last year, according to Henderson International Income Trust (HINT) research, as global coverage fell despite a record year for profits.

Global corporate profits hit a record £2.3 trillion in 2018, which represents a rise of 7.2 per cent on the previous year. Three-fifths of companies and two-thirds of sectors boosted profits, with the majority of both reporting record results. Henderson expects this trend to continue in 2019 with more record profits.

Yet dividend payouts have been rising faster than profits. The collective dividend payout hit a record £1 trillion in 2018, a rise of 9.2 per cent. Dividends have risen by 10.3 per cent a year since 2010, outstripping annual profit growth of 6.5 per cent. Dividend cover is expected to settle at a multiple of 2.2 this year – its lowest level in a decade.

In the UK, 26 FTSE 100 companies are forecast to yield 6 per cent or more this year, according to AJ Bell research. But those dividends are forecast to be covered just 1.56 times by profits. Overall, FTSE 100 shares are expected to produce a dividend yield of 4.8 per cent in 2019, covered 1.63 times by profits, the investment platform said. That is slightly behind 2018 and down on a multiple of two in 2014 when the index's dividends were last twice covered by profits.  

High dividend yields have offered investors a reliable source of income in a low interest rate environment dampened by sustained levels of quantitative easing, which has offered scant yields on bonds. Ben Lofthouse, fund manager of Henderson International Income Trust, emphasised that trends in dividend coverage can be dictated by the economic cycle. 

“Typically, dividend cover rises quickly as an economy turns upwards,” he said. “A long economic expansion is then associated with a steady decline in cover ratios as companies loosen the purse strings. And finally, an economic contraction causes sudden drops in dividend cover, before the process begins again.”

Shares in UK housebuilders have been among the highest dividend yielders in recent years, boosted by buoyant house prices and the government's Help to Buy scheme. Yet those yields have risen higher – see the 11.5 per cent forecast for Persimmon's (PSN) shares this year – as scepticism over the sustainability of those payouts has also mounted.