Finance

How safe are your FTSE dividends: Top firms are set to pay £10bn more than in 2016, but 80% of this growth is in just four sectors

Companies in the FTSE 100 are expected to pay £10billion more to investors this year than they did in 2016 – a 15 per cent rise to £82billion.

But with most of these dividend payments coming from a very small number of potentially volatile firms, some believe that there is a serious risk we are fast approaching widespread cuts.

More than 80 per cent of growth is being driven by firms in just four sectors: mining, financials, consumer staples and oil and gas.

In fact, half of the growth is due to come from just six companies – Glencore, Rio Tinto, Lloyds, BHP Billiton, Royal Dutch Shell, and Anglo American.

Paying out: Companies in the FTSE 100 are expected to pay £10bn more to investors this year than they did in 2016

Aside from Lloyds, they are all mining or oil firms whose dividends would come under serious pressure if commodity prices collapsed or the pound significantly strengthened.

These are events that are difficult to predict and, most worryingly, have a decent chance of occurring.

Worse still, research from investment platform AJ Bell suggests that the companies expected to pay the largest dividends are also those which are at the highest risk of being unable to pay them.

The likelihood of a firm being able to pay its dividend can be expressed using a measure known as dividend cover, which sees a company’s profits divided by the dividend it pays.

So a business which makes a profit of £100 and pays back a dividend of £50 to investors would have a dividend cover of two, while a firm which earns £100 but pays back £150 would have a cover of 0.66.

Digging deep: Mining firms like Glencore and Anglo American are among the main drivers of the dividend increase

AJ Bell says a company with a score of two or above is ideal because its profit is at least double dividends.

A firm with cover of between one and two is riskier because it has less room for error, and a firm with a score below one is at risk because it is paying out more than it is earning.

Based on forecasts, dividend cover for the entire FTSE 100 is 1.63, and, somewhat worryingly, the average coverage of the index’s ten largest dividend payers is just 1.29 – uncomfortably close to the danger level.

Oil majors BP and Royal Dutch Shell are expected to have a dividend cover of less than one, meaning they are using sources of money other than profit to meet the high payments they have promised investors.

Likewise, although housebuilders Taylor Wimpey and Barratt Developments are expected to make more money than they pay back to investors, their cover sits below the ideal level.

Russ Mould, investment director at AJ Bell, recommends investors target firms which offer what he calls the ‘dividend sweet spot’ – a dividend of at least 3 per cent and profits which are at least double the payments to investors.

Among those set to fill that criteria this year are broadcaster ITV, miner Anglo American, retailer Next, British Airways-owner International Consolidated Airlines, and advertising giant WPP.

With consumer spending falling, manufacturing growth slowing, and the housing market stalling, Helal Miah, an analyst at The Share Centre, believes the security of FTSE 100 dividends has hit its weakest level since 2009.

Furthermore, with the pension regulator suggesting it could start to intervene when firms prioritise dividends over their financial stability, he says the market may be forced to scale back payments.

But all is not lost. He says: ‘The good news is that the UK’s largest companies have shown signs of improving operating margins, which should filter through to net profits and earnings.

‘Better commodity prices and strengthening global growth bodes well for companies in the FTSE 100 and their profitability.’

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