Outlook The stock market has in recent times become a happy place for those looking for income yield – a commodity in short supply elsewhere. That might be about to come to an end. Panmure Gordon’s Simon French has demonstrated that the level of earnings cover over dividends is now at a 16-year low. What is worrying, if you’re after income, is that the previous lows came after economic shocks that led analysts to downgrade their forecasts. By contrast, we are at a point in the cycle when earnings cover should be high so that there would be enough headroom to at least maintain payments if things start to go south.
The upshot? If there is an economic shock (and there are any number of directions from which one could come), then an awful lot of companies will have to cut their payments. Dividends are, in general, a good thing. But it is entirely possible for companies to strike the wrong balance by, for example, focusing on this type of capital return at the expense of investment and their overall financial health.
We may have reached that point. It’s not a happy situation for income-seekers. But for the health of British companies, and perhaps of the wider economy too, it is time for a retrenchment.