The Share Centre’s latest Profit Watch UK report found FTSE 350 company profits jumped 157% over the past year, from £67.2bn to £172.7bn, while dividends climbed 10% to £93.6bn.
This represents a dividend cover ratio increase from 0.8x to 1.8x. It is the first time the ratio, which is produced by dividing profit-after-tax by the dividend, has exceeded 1.0x in more than two years.
Miners excel
The research also found dividend cover has improved over a wide range of sectors, with 17 out of 19 seeing an increase.
Mining companies saw the fastest rise from 0.4x to 3.1x, driven by a sharp recovery in commodity prices and cost-cutting measures. Mining profits increased from £321m to £21.8bn over the year.
Consumer goods and housebuilding companies experienced the next biggest increase, hitting 4.5x. The Share Centre said this was driven by a large profit reported by British American Tobacco (BAT) on its Reynolds American holding.
Property and utilities, on the other hand, saw a fall in dividend cover. The ratio for property companies fell from 3.5x to 1.9x while for utilities, the drop was from 1.5x to 0.7x.
Elsewhere, the FTSE 100 dividend cover was stronger than the FTSE 250’s for the first time in three years as the multi-national companies, including Shell, BHP Billiton, HSBC and BAT, in the former index enjoyed a windfall from an improving global economy. Dividend cover in the FTSE 100 increased to 1.9x from 0.7x the year before.
The Share Centre research investment analyst Helal Miah 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.”
Headwinds
Miah also warned of headwinds ahead due to a slowing UK economy which will challenge the profitability of domestically-focused companies.
He added: “We are already seeing a slowdown in the housing market and consumer spending, which likely means pain for companies dependent on these areas.”
Oliver Brown, investment director at RC Brown Investment Management and manager of the MFM UK Primary Opportunities fund, said rising dividend cover is a positive development.
He added: “We always tell clients that a substantial part of their return comes from dividends so a doubling of dividend cover is very supportive to valuations, which we accept are not cheap but gives us confidence that companies will have the ability to continue increasing their dividends.”
