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Dividend cover among FTSE 100 and 250 companies has fallen to the lowest level since 2009, as profits have tumbled amid the commodities rout and supermarket price war.
A report from online stockbroker The Share Centre has flagged that dividend cover, based on full-year 2014/15 profits and the final and interim dividends on those profits, has fallen to just 1.2 times, down from 1.5 times 12 months previously.
That comes after profits from FTSE 100 and 250 companies fell to £102.8 billion in the year to March, down £16.8 billion on the figure for the previous 12 months. Despite that, dividends rose to £83.1 billion over the period, up from £79.9 billion the previous year.
The Share Centre excluded the £48.1 billion profit Vodafone (VOD) made on the sale of its US operations to Verizon, and the resulting £15.9 billion special dividend, from its calculations.
'Profits among the country's largest companies have been repeatedly knocked by a slew of global headwinds and sector specific difficulties,' said Helal Miah, research investment analyst at The Share Centre.
'Commodity price falls, currency swings, slowing global growth and, most recently, supermarket price wars have hit profitability in the FTSE 100. In turn, dividend cover has been stretched, with the majority of companies maintaining or expanding their payouts to shareholders, despite margins being squeezed.'
Consumer services stocks, which include supermarkets, have registered the biggest fall in dividend cover, down to 0.6 times, from 1.4 times last year.
Dividends have fallen by 12% over the period, after Tesco's (TSCO) high profile scrapping of its payout and a cut in the payment from Sainsbury's (SBRY). But profits have fallen even faster, down 59% over the period, as retailers deal with the mounting challenge posed by discounters such as Aldi and Lidl.
It has been a similar story for oil and gas companies, whose cover has fallen to 0.7 times, after a 65% slump in annual profits against the backdrop of the commodities rout.
'It is becoming apparent that 2015 is going to be a difficult year for the UK's biggest oil giant with pre-tax profits already expected to drop from $28.3 billion (£18.6 billion) in 2014, to $17.2 billion for this year, with revenues also expected to fall to $268 billion from $421 billion,' he said.
'The big concern is likely to surround Shell's dividend... and as we know from the financial crisis of 2008, a healthy dividend does not a good company make. All the banks had healthy dividends and we know what happened to them, and the decline in the share price is making some investors rather twitchy.'
The Share Centre highlighted that of the different sectors that make up the FTSE 100 and 250, dividend cover had fallen in seven, with only three seeing cover improve.
Those three included financials, as bank profitability rose much more quickly than dividend payouts. Royal Bank of Scotland (RBS), which reported a surprise 27% jump in profits in July, still hasn't paid a dividend since the financial crisis, while Lloyds (LLOY) only resumed payouts earlier this year with a token 0.75p final dividend for 2014, followed by a further 0.75p interim dividend for this financial year.
Surprisingly, dividend cover among basic materials firms, including miners, also rose, to 1.6 times over the period. However, The Share Centre attributed this rise to large asset writedowns made the previous year that were not repeated. The mining sector has recently been rocked by Glencore (GLEN) skipping its dividend.
Technology stocks were the only others to see dividend cover rise, to 1.6 times.
FTSE 250 stocks meanwhile boast much healthier dividend cover than their blue-chip counterparts, at 1.5 times versus 1.1 times. This is down from two times the previous year, although much of that is due to the £1.1 billion loss posted by Vedanta Resources (VED).
'The picture is somewhat rosier in the 250,' said Miah. 'It has been less exposed to negative global trends, and as mid-cap companies outperform their large-cap peers, dividend cover has been under less pressure.
'For the UK's listed companies as a whole, we believe balance sheets are strong enough to allow dividends to continue to grow, even if profitability takes time to recover, but high profile dividend cuts at some of Britain's famous corporate names demonstrate that investors cannot take dividend growth at individual companies for granted.'