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This report is not a personal recommendation and does not take into account your personal circumstances or appetite for risk.

Which UK Index dividend will be cut next?

UK Index heavyweight Vodafone slashed its dividend by 40% this morning. To some investors this was a surprise. To those in-touch with the financial markets, perhaps via a friendly broker such as Accendo, it was no surprise at all.

The threat of a dividend cut explains much of Vodafone’s share price decline of the last 6-8 months. Organic revenue growth continues to slow while spending (and borrowing) for acquisitions and 5G rises. Not a good recipe; higher spending and lower profits, means less cash for dividends.

To those attracted to high dividend yields (what analysts expect in terms of annual dividends from a company relative to its current share price) Vodafone has been difficult to ignore. 10% return? Not to be sneezed at. However, the dividend yield was high and rising only because the share price was falling. Not because the forecast dividend was rising.

Expectations for a dividend pause to save money were rife. Or a significant reduction at the very least. It culminated this weekend with a Times article which fanned the fires of fear before today’s full year results. And rightly so. The results were OK; revenues a shade below consensus; profits at the lower end; guidance is for low single digit profits growth and flat free cash flow.

Some argue the cut was necessary. They are probably right. We could even ask whether the worst case scenario has been realised, putting a floor under the share price. Are they now a good investment, with a still generous 6% yield? Others suggest acquisition risk and high debt means proof of a turnaround must show its face before jumping back in.

Whichever it is, my point is not to call the bottom on Vodafone. Not at all. My aim is to highlight that projected dividend yields in the high single-digits do not automatically mean a great trade/investment. We need to be certain that the dividend will be paid, and maintained. This is, after all your reward for risking your money. You also need to be confident the share price will hold up, or falls no more than the yield to keep you break-even.

If you lose on one (share price or dividend), the other has to offset it. If you lose on both fronts…

To sign off, I leave you with a list of stocks showing up on my filter with suspiciously generous yields. I’m not saying they will all be struck by the same knife as Vodafone. I merely ask that you double-check them, whether you are already in the stock or thinking about doing so.

We have a miner yielding 12%. How about several house-builders offering 9-11%? You interested in major Utilities at 9-10%? Lastly, we have several supposed safe-havens at 8-10%. My list includes some big names which may be in your portfolio or on your shopping list.

Future dividends safe or at risk? Is a 15-50% share price sell-off overdone or fully justified? Worth jumping in or buying more? A warning sign for us that the dividend could be cut/reduced? Or are the shares still overvalued and could fall further? Whatever the situation, all I ask is that you look before you jump.

Get access to our Research Gold Pass for the full list of yields. I’m sure some will surprise and others will raise concerns. As it stands, 40% of UK 100 stocks yield more than 5%. A potentially decent yield to lock in, especially if the markets keep rallying in 2019?

Mike van Dulken, Head of Research, 14 May 2019


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This research is produced by Accendo Markets Limited. Research produced and disseminated by Accendo Markets is classified as non-independent research, and is therefore a marketing communication. This investment research has not been prepared in accordance with legal requirements designed to promote its independence and it is not subject to the prohibition on dealing ahead of the dissemination of investment research. This research does not constitute a personal recommendation or offer to enter into a transaction or an investment, and is produced and distributed for information purposes only.

Accendo Markets considers opinions and information contained within the research to be valid when published, and gives no warranty as to the investments referred to in this material. The income from the investments referred to may go down as well as up, and investors may realise losses on investments. The past performance of a particular investment is not necessarily a guide to its future performance.

Prepared by Michael van Dulken, Head of Research

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