The UK’s top firms paid out more in dividends last year than they made in profits for the first time since the recession, as they ate into reserves, balances sheets and future earnings to protect payouts to shareholders.
Despite profits at the 350 biggest UK-listed firms tumbling by more than half to £76.2bn in 2015, they still paid out ten per cent more in dividends than in 2014. That took the dividend cover ratio, a measure of how much profit is made for every £1 paid out to shareholders, across the index below one for the first time since the second quarter of 2009.
It was poor performance from the oil, mining and banking sectors which dragged the overall score down. Excluding those sectors, firms made £1.65 in profit for every £1 returned to shareholders. Moreover, the mid-cap FTSE 250 index also posted a cover ratio above one, while for the FTSE 100 is was just 0.89.
However, the cover ratio fell compared to 2014 across the board as firms proved reluctant to cut dividends in the face of pressure on profits.
“Firms want to look after their shareholders,” said Adam Laird, investment director at Hargreaves Lansdown.
“They will only cut dividends when they believe there is a necessity to, as its sends out a signal that perhaps the experience of the company and the situation it is in isn't just a short-term issue. As soon as they make a cut they are seen as a lot less dependable by investors.”
Helal Miah, an analyst at The Share Centre said: “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. Eventually, it is important to face facts.”