Dividend cover is improving
“One other reason why dividend growth may be slowing (and estimates sagging slightly) is that dividend cover is improving. Companies may be choosing to let earnings growth outpace dividend growth so they can reinvest in their businesses, bolster balance sheets and rebuild cover, so that their shareholder distributions are not quite the hostage to fortune that they proved to be in 2020, should another unexpected shock emerge from left field.
“The aggregate earnings cover ratio for the FTSE 100 is now seen rising to 1.95 times in 2022, according to analysts’ consensus and dividend forecasts.
“That is a further improvement on 2021’s 1.85 times earnings cover and the skinny 1.59 times ratio served up in 2020. A further gain to 2.03 times is expected by analysts in 2023, to take earnings cover to its highest level since 2014, which was the last time cover reached the comfort zone of 2.00 times or higher.”
Source: Company accounts, Marketscreener, consensus analysts’ forecasts
Stalling economic recovery could hinder dividend growth
“A renewed drop in economic activity – for whatever reason – could still pose a big risk to dividend forecasts all the same.
“Analysts currently believe that 2022’s (adjusted) net profits will exceed not only the pre-pandemic peaks of 2018 but the current all-time high of 2011, when commodity prices were roaring higher, and miners and oil producers generated 42% of the FTSE 100’s profits between them.
“Oils and consumer discretionary stocks are expected to drive the forecast 6%, or £14.2 billion increase in aggregate FTSE 100 pre-tax profit for 2022, as miners and financials both see lower earnings. The forecast drop at miners reflects lower industrial metal prices (and higher costs), while the banks’ profits in 2021 are likely to have been flattered by write-backs relating to the bad loan provisions they took in 2020.
“If the economy offers little or no assistance – or even hinders – then these earnings forecasts, and by extension, dividend payment estimates could find themselves exposed to the downside.
“Equally, an unexpectedly strong recovery, and one that sparks higher commodity prices as inflation takes a grip, could leave oils, miners and – by extension – the FTSE 100 in clover.”
Source: Company accounts, Marketscreener, consensus analysts’ forecasts
