Dividend cover, a measure of dividend sustainability, has reached a three-year high as profits among the UK’s largest 350 companies rose much faster than dividend payouts.
A survey revealed that while profits-after-tax rose by a hefty 157% to £172.7bn, dividends swelled by a more modest 10% to £93.6bn. Those numbers give a dividend cover ratio of 1.8, up from 0.8 a year ago. The figures are expected to reassure income investors.
Dividend cover is the ratio of profit-after-tax to dividends paid to shareholders.
Helal Miah, research investment analyst from the Share Centre, which produced the data along with Link Asset Services, said: “Rocketing profits among UK plc has driven a rapid recovery in dividend cover, much to the relief of income investors, who had justifiably begun to worry that their dividends might not be sustainable.
“Companies can only afford to pay more in dividends than they make in profits for a very short time. Dividend cuts follow quite quickly.”
Miah warned that a slowing UK economy will hit profitability, which may affect the sustainability of dividends.
Earlier this week it was reported that debt at UK-listed companies had a hit a record high of £390bn.
The demand for shareholder payouts, along with investment, saw borrowings increase “significantly”, according to the survey.
Gearing peaked in 2015–16 at 83%, but although debt has increased, its ratio to equity has lowered. The gearing ratio now stands at 73%, with profitability climbing in the past year.
“It seems we may now have seen peak indebtedness,” said Justin Cooper, chief executive of Link Market Services.
“Now, healthy global growth means higher profits. That has both brought gearing levels down, and means that interest costs and dividends are much more comfortably covered by profits. What’s more, companies are less dependent on short-term borrowings than at any time in the last ten years.”
Figures from broker AJ Bell show that the FTSE 100 has forecast in Q2 this year dividend payouts of £88.8bn, a figure that would equate to 8% growth on 2017.
Figures released in May by broker Janus Henderson revealed that Q1 global dividends had jumped by 10.2%, year-on-year, to $244.7bn. Janus said the numbers were driven by a weak dollar. The firm predicted that 2018 would see global dividend growth of 6%.
Ben Lofthouse, director of global equity income at Janus Henderson, said: “2018 has started well for dividends. Economic growth is strong, and corporate profitability is rising, generating cash that companies can return to their shareholders.”