In times of market uncertainty, asset allocation in Equities can typically adopt a flight to safety strategy, diversifying into to less risky, less volatile stocks. In light of the recent market sell off there remains a lot of unallocated cash sat with investment managers looking to be put to use.
Perhaps the obvious choice would be to invest in high yielding income stocks but now even those previously perceived ‘safe haven’ companies are under threat as CEO’s address falling profits by cutting their dividends (á la Tesco, Centrica, Anglo American)
So how do you avoid investing in those stocks whose dividend may be unsustainable or identify the stocks in your Portfolio most at risk of dividend cuts? One simple way is to use OTAS Dividend Analysis.
To better understand the prospects for income payments investors need to consider the how well the future dividend is covered by earnings(expressed as dividend cover ratio.) Typically, if the dividend cover is above 2 the dividend is regarded as safe, however a ratio under 1 indicates the company is using retained earnings from prior years to pay this years dividend and potentially at threat.
OTAS Dividend Analysis plots dividend cover against projected forward yield expectations and identifies the most statistical extreme outliers across a Portfolio or Index.
Consider the FTSE 100 as an example :-
On the scatter plot below each dot represents a FTSE100 company with those stocks most diverged from the cluster set highlighted in yellow based on 12m Fwd estimates. Focussing on the upper left-hand side, five companies- Rio Tinto, Royal Dutch, BHP Billiton, Vodafone and Aberdeen A.M all currently screen negatively in terms of forward yield assumptions versus dividend cover and could be considered at risk.
Rolling this further out and assuming analysts FY1 estimates for 2017. the scatter plot changes and Aberdeen A.M and Vodafone are replaced by Anglo American(who already cut their dividend in December) and Direct Line Group which offers an expected 8.75% yield vs just 0.94 dividend cover.
Inversely, whilst this Blog has concentrated on the companies whose dividend is potentially under threat this analysis can also be used to focus on those stocks which may offer a potential income growth investment opportunity.
Screening the 12m fwd plot again, ARM Holdings, Hikma Pharma, Rangold Resources & Worldpay Group all offer a low market relative dividend yield which is currently at least 3 times covered by earnings, suggesting there is room for senior management to increase future payouts to shareholders.
With over 12,000 stocks covered globally, you too can run similar such analytical screens for your portfolio or universe of stocks for dividends and a range of other factors.
Call us or visit www.otastech.com for your free trial today.
