Are UK dividends heading for the danger?

Luke Graham, special to
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Investors with an eye for dividends should be careful about buying U.K. equities, with potential cash pay-outs near a record low, according to research released Thursday from stockbroker Panmure Gordon.

According to the research, the cover (which is the ratio of a company's net profits to the sum paid to investors on U.K. equity dividend pay-outs) has declined to a 20-year low. Meanwhile, it also states that projected earnings per share (EPS) – an important metric used by analysts to gauge the value of a stock - have decreased by 15 percent year-on-year.

For comparison, U.S. and German EPS estimates have dropped by just 3 percent.

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This places a question mark over whether U.K. companies can maintain their current pay-outs if there was an unexpected shock or market downturn in the near future.

"The recent decline in dividend cover on U.K. equities is unsustainable and poses substantial investment risk to the unwary investor," Simon French, chief economist at Panmure Gordon, wrote in the report.

"Equity selection joins market timing as the key factors in generating alpha (the relative return on an investment) in today's U.K. equity market."

The report also shows dividend cover across U.K. equities has reached a ratio of 1.67 this year, worse than the previous record-low set in 1998/1999.

While Panmure Gordon maintains its view on being overweight on U.K. equities, due to favourable macro conditions, the report warns against blindly taking long positions on all sectors.

"A range of corporates have adopted pay-out plans that have overstretched their earnings generation capability – these are set to retrench in the coming months," French added.

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