A reading of less than 1 means companies paid out more in dividends than they made in profit.
Dividend cover has fallen by 38% in the past year, dropping to 0.98x from 1.63x. Based on profits of £76.4bn made by the UK’s top 350 listed firms in the year to the end of December 2015 and reported by the end of March 2016, dividend cover is now at its lowest level since the third quarter of 2009, when it stood at just 0.73x.
An overall profit slide among the 350 companies covered in the Profit Watch UK report and the Capita Asset Services UK Dividend Monitor, has been the principle driver of this.
The ratio has fallen for four consecutive quarters, with the most recent fall due in large part to the banking, mining and oil and gas sectors. Excluding these three troubled sectors cover stood at 1.65x. Healthcare bucked the trend, with dividend cover rising 70% to 1.69x.
Notably, coverage ratios in FTSE 250 were stronger than in FTSE 100, thanks to stronger profit growth of mid-cap companies. Cover in the 250 currently stands at 1.56x, compared to 0.89x in the FTSE 100, reflecting the 34% fall in net profits in the FTSE 100, compared to the 7% increase in the FTSE 250.
The market reaction to the EU referendum result suggests that FTSE 250 profitability will deteriorate as the economy slows however, warned The Share Centre.
“Plummeting profits in the FTSE 350 have undermined dividend cover across the board, even before the impact of a Brexit vote is fully felt among listed companies,” said Helal Miah, research investment analyst from The Share Centre. “Finance directors will usually try to ride out a soft patch for profits and hold the dividend steady for as long as they prudently can."