Dividend cover worryingly thin for the FTSE 100’s biggest payers

New analysis from investment platform AJ Bell shows that:

• Almost half (48) of the FTSE 100 firms have forecast earnings that cover their dividends by less than two times for 2016
• The ten stocks forecast to pay the highest dividend yield in 2016 all have earnings that cover their dividend by less than two times for 2016
• The average dividend cover for the FTSE 100 is just 1.47 and for the ten highest yielders it is just 1.22 for 2016
• However, there are ten firms that are forecast to pay a dividend of over 3% this year that do have more than two times earnings cover for their shareholder distributions

FTSE 100 dividend danger zone

Each quarter, AJ Bell takes the forecasts for the FTSE 100 companies from the leading analysts and aggregates them to provide the dividend outlook for each constituent firm. The data below relates to the outlook for 2016.

The ten stocks forecast to pay the highest dividend yield in 2016 all have forecast dividend cover below the 2.0 times level which provides some welcome protection for the payment, should anything unexpectedly go wrong:

Seven FTSE 100 firms are forecast to have dividend cover of less than 1.0 times:

Russ Mould, investment director at AJ Bell, comments:

“Reinvested dividends have accounted for 65% of total returns from the FTSE All Share over the past 30 years. It is therefore tempting to just seek out the stocks that might pay the highest dividends.

“However, investors looking at high yielding stocks must look at dividend cover as well as the headline forecast yield, because some of the juiciest-looking forecast dividend yields could just prove too good to be true.

“Ideally you want a company’s earnings to be twice the size of the dividend payment to give it a cover of two. Anything below 1.5 times earnings cover starts to question the sustainability of the dividend should anything go wrong and anything below 1 means the company is having to dip into cash reserves or borrow or sell off assets to pay their dividend.

“There are 52 firms in the FTSE 100 that are forecast to have earnings cover of twice their dividend payment and 10 of these are forecast to yield over 3% in 2016.”

The stocks forecast to offer the highest dividend yield in 2016 with dividend cover of over 2 x earnings: