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Dividend cover improves for London-listed companies thanks to Shell and BP- research

Published: 01:31 13 Oct 2022 AEDT

Law Debenture Corporation -

London-listed companies are on average paying dividends with much better support from profits than before the coronavirus pandemic, thanks to the oil industry, though UK dividend cover is lower than the global average, according to new research. 

UK dividend cover was below the global average in 2021, according to the dividend report from Henderson International Income Trust, but the likes of Shell PLC (LSE:SHEL, NYSE:SHEL) and BP PLC (LSE:BP.) have lifted the average. 

Global dividends will reach a record £1.25 trillion in 2022, a rise of 13.1% on last year, when the pandemic was still affecting payouts.

But the significant cuts in dividends for London-listed companies during the pandemic "provided a new, healthier base for payouts", according to Henderson.

UK dividend cover was just 1.0 times on average between 2015 and 2020, in other words the dividend per share was equal to earnings per share. 

This was less than half the global average and indicated that London-listed companies had on average been over-distributing.

But last year, UK dividend cover rebounded to 2.0 times, the research found, which although still below the rest of the world could be on track to exceed the global average in 2022, the report suggested, mainly as the rise in oil profits is not matched by the rise in its dividends.

The research reveals that global dividends also face the coming economic downturn "better supported by profits and corporate cash flow than at any time since 2011", though having ended last year at a decade high of 2.6 times it is expected to dip slightly to 2.4 times this year, which is still above the historic average.

“In uncertain times investors prize companies that generate plenty of cash in the here and now and which have more visibility on future earnings," said Ben Lofthouse, head of global equity income at Janus Henderson and portfolio manager of the Henderson trust.

“These companies are often more likely to pay dividends to their shareholders. This explains why classic income stocks – companies that pay dividends – have performed so well in 2022," he added.

The analysis also shows there has been no increase in yield traps – companies that have seductively attractive dividends that they are unlikely to be able to sustain.

Just one company in eight is currently a yield trap, according to the trust's managers, which is in line with this time last year and down from one in six before the pandemic, with risky sectors including chemicals facing high energy costs, real estate companies facing higher borrowing costs and miners facing falling commodities.

Research from AJ Bell last week also indicated London's dividends are likely to stall overall at £81.5bn, even though 2022 could become the best year ever for cash returns from the FTSE 100, with £81.5bn forecast in ordinary dividends, plus £1.6bn of special dividends and a record £50.3bn in buybacks announced so far.

For the FTSE 100, members are forecast to increase ordinary dividend payments by 11% in 2022, although this figure is expected to slow to 8% in 2023

Financials are now expected to be the biggest contributor to FTSE 100 dividends in the coming year, following cuts to estimates for miners’ dividend payments

Three FTSE 100 firms are currently forecast to offer a double-digit yield in 2022 and twelve are expected to offer more than 7% this year – five financial companies, three housebuilders, two miners, one telecoms company and one tobacco firm

Lofthouse noted: “During inflationary periods it is important to find companies with good dividend cover, pricing power, cash flow, and modest borrowing, some of the factors used in our dividend trap analysis."

“If inflation and recession come at the same time, profits may fall, but history shows that dividend income is much less volatile than profits over time as companies flex the proportion of their profits they pay to shareholders. With dividend cover so high at this point in the cycle, we can have some significant confidence for 2023 that overall dividend payouts will prove resilient.

“Taking an international perspective that diversifies across different geographies and different sectors is a powerful means of delivering long-term investment returns.”

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