Dividends under threat as firms struggle with slump in earnings

NEW RESEARCH by the Share Centre has found that dividend cover, which measures earnings against dividends paid to shareholders, has fallen to a three-year low.

A lower dividend cover ratio suggests that profits have fallen, making a cut in dividends more likely. A higher ratio indicates a healthier profit level.

Though FTSE 350 firms have tried to maintain dividend levels, profits have been more volatile. A dip in the last quarter of 2012 and the first quarter of this year pushed the dividend cover ration down to 1.4x, the lowest since the beginning of 2010. Profits had fallen to £106bn in the year to March.

According to the report, the mining sector has already effectively abandoned strong dividend cover which was common in the past. Helal Miah of the Share Centre commented: “In some sectors, notably the mining companies, coverage ratios have become uncomfortably low.” Miah added: “This year, profitability is improving, so dividend cover should begin to turn around.”