The worst is over for income-seekers

Shell is currently earning just a quarter of its dividend

It has not been a good year for dividends. The downturn in the commodities sector damaged oil and mining profits. Turbulence in financial markets and low interest rates have hit banks. As a result, payouts from FTSE 100 companies in particular have been reduced. Could there be more to come?

Profits among FTSE 350 companies are down by around 50% in the past year, as FT.com’s David Oakley points out. In the FTSE 100, dividend cover, the ratio of profits to payouts, has fallen below one for the first time since the financial crisis. So companies paid out more in dividends than they made in profits, implying that some may need to sell assets or borrow money to keep meeting payouts. Shell, for instance, is currently earning just a quarter of  its dividend; Lloyds Banking Group, around a half.

The post-Brexit turbulence has now fuelled fears of more domestically orientated sectors, notably housebuilders, running into dividend trouble amid a potential property market downturn. One builder, Berkeley, has announced a share buyback programme to shore up confidence in its stock. The FTSE 250 index’s dividend cover is around 1.8, down from over two a couple of years ago.

The overall picture, though, is starting to improve. The blue chips make over 70% of their sales abroad, and many report and pay dividends in dollars. So the pound’s steep fall should bolster earnings in the second half of the year, while oil and commodities prices have stabilised or risen. Taking the UK market as a whole, then, income-seekers may be past the worst.


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