Dividend cover is a ratio defined by profit after tax divided by dividends paid. The higher the ratio, the greater the comfort that a company can afford, and can sustain, its dividend payouts. A lower ratio means a cut in the dividend is more likely if profits fall.
Analysis shows that dividend cover based on profits for 2014 and the interim and final dividends on those profits, has fallen to 1.2x, down from 1.5x one year ago. This is the lowest level of cover recorded since the third quarter of 2009, when it was just 0.7x.
According to The Share Centre’s data, net profits have fallen significantly over the past couple of years, down to £102.8bn on a rolling annual basis in the first quarter of 2015, a reduction of £16.8bn compared to a year ago.
In contrast, FTSE 350 dividend payments have risen to £83.1bn, up from £79.9bn a year ago, putting coverage ratios under pressure.