Dividends paid by UK firms have become more secure as profits exceed dividends for the first time in two years.
The Share Centre found that dividend cover – a measure of how sustainable dividends are – more than doubled in the past year among the UK’s 350 largest listed companies, meaning cover is at its highest level for three years.
Dividend cover has risen from 0.8x to 1.8x as company profits recovered among the top 350.
Profits reported by the UK’s top 350 listed firms over the last year increased by 157%, rising from £67.2 billion (€76 billion), to £172.7 billion.
Dividends paid on those profits have increased at a much steadier rate, climbing by 10% to £93.6 billion. In the previous two years dividends exceeded profits.
However, not all sectors showed positive results. Property companies saw a large fall in dividend cover, down from 3.5x to 1.9x, as their profits more than halved on the back of a slowing property market. Utility companies also saw a fall from 1.5x to 0.7x, meaning they paid out more in dividends than they made in profit. The sector’s profits fell by 22%, largely driven by a weak performance from Centrica.
Helal Miah, research investment analyst from The Share Centre, 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.”
There may be headwinds ahead, though, said Miah. The slowing UK economy will challenge the profitability of domestically-focussed companies and “we are already seeing a slowdown in the housing market and consumer spending, which likely means pain for companies dependent on these areas”.
The Share Centre based it analysis on its own ‘Profit Watch UK’ report and the Link Asset Services ‘UK Dividend Monitor’.
Read more on UK dividends here.
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