We explain the growing concerns over cash payouts from three FTSE 100 companies
Thursday 07 Nov 2019 Author: Tom Sieber

According to the latest AJ Bell Dividend Dashboard report, the FTSE 100 is yielding 4.8%. However, the same research shows FTSE dividends are, on average, covered just 1.63 times by earnings which suggest investors need to investigate the sustainability of these payouts.

For example, the housebuilding sector offers some of the largest yields on the FTSE 100 but cracks are starting to appear. Furthermore, BT’s (BT.A) dividend is under the spotlight and oil major BP (BP.) was forced to address speculation over its own dividend following its third quarter update (29 Oct).

Housebuilder Crest Nicholson (CRST) put investors on alert in the wake of its recent profit warning (31 Oct), saying it would continue to pay a dividend of 33p as long as it didn’t see a significant deterioration in trading conditions.

Crest Nicholson is transitioning away from higher end properties where prices are under particular pressure and new chief executive Peter Truscott may feel he has greater leeway to scale back the dividend.

However, there are looming pressures on the housebuilders in general as build costs go up, the housing market softens and the regulatory backdrop becomes less helpful. Strong balance sheets seem unlikely to spare investors in the sector from dividend cuts indefinitely.

BP’s finance director Brian Gilvary apparently told analysts any increase in the dividend before the departure of CEO Bob Dudley in early 2020 would be premature, leading to a fall in the share price, but the company subsequently announced that no decision had been made regarding the fourth quarter payout.

Telecoms group BT is also splitting analyst opinion on future dividends. The payout has been held at 15.4p per share for the past three years as it juggles substantial cash flow demands from infrastructure expansion plans while paying down its £18bn net debt and servicing its pension scheme deficit.

The company has so far insisted that it has no plans to cut dividends but consensus forecasts for the financial year to 31 March 2021 are pitched at 13.3p, a rough 14% cut. Numis analyst John Karidis believes this is an overly bleak assessment and that BT will only need to reduce dividends if it decides to accelerate its current fibre roll-out.

Speeding up its fibre plans could be the ‘necessity that drives BT’s hand’, said Jefferies analyst Jerry Dellis. He argues that reducing its shareholder payout by 20% could prove a useful bargaining chip for light touch intervention with regulator Ofcom. The watchdog is set to publish its review on speeding up fibre roll-out across the UK in December.

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