Pearson PLC (LON: PSON) put the cat among the pigeons on Wednesday with plans to cut its dividend in order to shore up its threadbare balance sheet – news that was greeted with a £2bn collapse in the value of the publisher.
It was part of a wider plan to muster funds, including the possible disposal of the company’s 47% stake in Penguin Random House.
Analysts reckon the payout will have to be chopped in half to 25-26p a share to get dividend cover back above two-times earnings.
Ideally cover should be above two; Pearson’s was 1.2-times, which, as the Russ Mould, investment director at funds group AJ Bell, points out was just a “little too skinny” and left little margin for error.
Of course, the company’s well-publicised problems in the US higher education market provided that error margin and the guillotine fell.
Pearson’s woes have left income investors scrutinising the FTSE 100 to assess which of the blue-chip index’s big dividend payers will be next to wield the axe.
Helpfully, investment firm AJ Bell has drawn up a list using that two-times dividend cover as the litmus test.
There are ten possible divi nobblers if you include the services firm Capita PLC (LON:CPI) at just over two-times cover.
Among the most vulnerable, according to AJ Bell’s analysis, are Royal Dutch Shell (LON:RSDB) and BP plc (LON:BP.), with cover of around one-times.
Thus far both have resisted following the lead of the miners and reducing the payout.
In fact it has been reported in some quarters that at the nadir of the oil cycle these two actually borrowed to maintain the yield at around 6%.
Insurer Admiral (LON: ADM)– with a 7.1% yield – is in trouble, according to AJ Bell with cover of 0.93-times, while Standard Life isn’t too far behind.
Builders Barratt Developments PLC (LON:BDEV) and Taylor Wimpey (LON:TW.) are also exposed at 1.5 and 1.2 times respectively.
AJ Bell’s Mould believes out of the ten listed, Capita is most at risk.
“Although the support services firm offers cover of 2.1-times, the company has already dished out two profit warnings and the experiences of sector peers like Mitie, Serco and Interserve suggest that when things start to go wrong they can really go wrong, as complex contract bidding processes soak up cash.”
He thinks big oil should be “safe for now”, while house builders have firm foundations.
The latter group tends to offer low cover but, generally, the firms have net cash balance sheets, Mould points out.
Looking at financial services, he added: “While lots of questions are asked about the others, no-one ever seems to question whether Direct Line and Admiral’s 7%-plus dividend yield are safe, even though earnings cover is scanty at just over or just below 1.0 times, so if there is to be a nasty surprise from left field perhaps it will come from one of these two.”