'Deeper' cuts from FTSE dividend giants shows Covid-19 has 'wrecked' income outlook
UK dividends at lowest levels since 2014
The forecast dividend payout for the FTSE 100 index in 2020 has plummeted by 17% compared to last year, according to AJ Bell's latest Dividend Dashboard report, which means that combined with an 11% fall over the previous year, UK dividends are now at their lowest levels since 2014.
The report, which found the dividend forecast has fallen from £91bn to £62bn over the past six months, said just ten firms are expected to generate 55% of the projected payout as 48 FTSE firms have so far either cut, deferred or cancelled a dividend payment.
Overall, this means the FTSE 100's forecast yield for 2020 now stands at 3.6% compared to the 4.7% yield expected at the start of the year, as 48 members of the index have so far either cut, deferred of cancelled payouts as a result of the coronavirus pandemic.
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Russ Mould, investment director at AJ Bell, said: "Currently, some 46 FTSE firms are expected to increase their dividend and just 30 cut them in 2020 but the cuts tend to be much deeper and come from firms whose contribution to the overall pot was so much bigger.
"Dividend payments are now expected to fall for two consecutive years before starting to forge a recovery in 2021."
That said, AJ Bell's report stated the revised forecast yield for the blue-chip index is a "more realistic figure" and that it remains "one of the few options available to the income seeker", with the Bank of England base rate anchored at 0.1% and the benchmark UK 10-year gilt "a mere 0.19%".
"This may be one reason why the FTSE 100 has rallied sharply from its March lows but investors must still tread carefully", it warned.
The Dividend Dashboard found that dividend cover across FTSE stocks will remain low this year, despite the 48 cuts or deferrals. The aggregate earnings cover ratio of the index stands at 1.4x, which equates to a 72% payout ratio.
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According to Mould, this suggests analysts, managers and shareholders are "pinning their hopes" on a pick-up in economic activity during the second half of the year.
"A second wave of the pandemic would, therefore, pose a big risk to dividend forecasts, as a recovery in profits is expected by analysts for 2021," he said.
"Income-seekers will need to decide whether they feel consensus estimates of a 35% drop in net profits in 2020, after a 5% slide in 2019, fully recognise all of the risks and dangers, especially as a 38% rebound is currently expected in 2021."
The report states that a 35% fall in profits would be the sharpest decline seen for the FTSE in five years, when commodity prices plummeted and banks were dealt hefty conduct and payment protection insurance costs.
Even then, the report pointed out the economy was in far better shape than it is now, deeming the current forecast of a 17% payment drop in 2020 and a 21% snapback in 2021 as "optimistic", especially given that earnings cover is thin.
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