Can a Statistical Test Predict Dividend Cuts?

  • Bookmark and Share

    Published Thu, 12 Jul 2012 17:40:01 GMT on The Motley Fool


    When is a high yield too high? For income investors, it's a critical question. A beaten-down share often offers a juicy yield -- but the company in question could well be beaten-down for good reasons, and that tasty-looking yield promptly vanishes as the dividend is slashed.
    As I wrote the other day, poor dividend cover is one sign that a dividend may be cut. Other financial metrics, such as poor interest cover, trigger similar alarms.
    But here's another way of spotting potentially problematic payouts.
    Blast from the past
    A couple of years ago, I related how, back in June 2007, I had set about looking for suspiciously high yields using a dividend spreadsheet published by longtime Fool reader StepOne -- a much-valued tradition now carried on by Kiloran.
    For those of you with a statistical bent, I was looking for yields that were more than one standard deviation greater than the FTSE 100 (INDEX: ^FTSE) average yield.
    For those of you not of a statistical bent, "standard deviation" refers to the measure of dispersion in a population or sample. In other words, I was looking for shares with a yield sufficiently far away from the average so as to be suspicious.
    At this point, I won't say any more; refer back to the original article for further details. Suffice it to say that the vast majority of the 14 shares identified went on to hit trouble -- cutting the dividend, launching rights issues, going bust, or indeed some combination of all of these. Check the list to see for yourself.
    The danger zone
    Two years on, I thought I'd repeat the exercise -- but looking for shares displaying danger signs today. Put another way, which shares right now have yields high enough to trigger alarms?
    Twelve companies, it turned out, have forecast yields that are at least one standard deviation higher than the FTSE 100's average forecast yield of 3.7%.
    Company Forecast yield
    Resolution 10.1%
    Aviva (LSE: AV.L) 8.9%
    RSA Insurance 8.7%
    Vodafone 7.5%
    Admiral 7.1%
    ICAP 6.8%
    BAE Systems 6.6%
    AstraZeneca 6.3%
    Standard Life 6.2%
    SSE (LSE: SSE.L) 6%
    National Grid 6%
    Legal & General 5.7%
    Source: Bloomberg.
    Cause for concern
    Interestingly, I hold four of these shares myself. At least seven are popular picks with most income investors, such as those who you'll find on our popular High Yield Portfolio discussion board.
    So should we be worried?
    The answer, in short, is both yes and no. A steady-as-you-go utility such as SSE, for instance, can afford a high payout. What's more, SSE prides itself on its payout, boasting that it is one of just six FTSE 100 companies to have delivered a real dividend increase every year since 1999.
    Other companies, such as BAE Systems and AstraZeneca, seem to have high yields because worries about their prospects have -- hopefully temporarily -- driven down the share price.
    But other companies would seem to have a case to answer. The new chairman at Aviva, for instance, will only go so far as to express the hope that the dividend can be maintained. And as I wrote last week, Standard Life and Admiral join Aviva in suffering from low dividend cover as well.... Read more

    Stock name                                     ISIN Last trade   P/E Earnings/Share Dividend/Share Dividend yield
    RESOLUTION P/E of RESOLUTION on Bloomberg Quote of RESOLUTION on CNNMoney FT.com - RSL:LSE P/E ratio of RESOLUTION on Google Finance Dividend yield RESOLUTION on Morningstar Dividend RESOLUTION on MSN Money Dividend RESOLUTION on Reuters RESOLUTION dividend GG00B62W2327 290.20   0.0 -5.17 21.14 7.28
    RSA INSURANCE GROUP P/E of RSA INSURANCE GROUP on Bloomberg Quote of RSA INSURANCE GROUP on CNNMoney FT.com - RSA:LSE P/E ratio of RSA INSURANCE GROUP on Google Finance Dividend yield RSA INSURANCE GROUP on Morningstar Dividend RSA INSURANCE GROUP on MSN Money Dividend RSA INSURANCE GROUP on Reuters RSA INSURANCE GROUP dividend GB0006616899 113.40   12.2 9.33 7.31 6.45
    ICAP P/E of ICAP on Bloomberg Quote of ICAP on CNNMoney FT.com - IAP:LSE P/E ratio of ICAP on Google Finance Dividend yield ICAP on Morningstar Dividend ICAP on MSN Money Dividend ICAP on Reuters ICAP dividend GB0033872168 344.70   52.6 6.59 22.00 6.38
    AVIVA P/E of AVIVA on Bloomberg Quote of AVIVA on CNNMoney FT.com - AV.:LSE P/E ratio of AVIVA on Google Finance Dividend yield AVIVA on Morningstar Dividend AVIVA on MSN Money Dividend AVIVA on Reuters AVIVA dividend GB0002162385 328.90   0.0 -15.19 19.00 5.78
    SCOTTISH&SOUTHERN ENERGY P/E of SCOTTISH&SOUTHERN ENERGY on Bloomberg Quote of SCOTTISH&SOUTHERN ENERGY on CNNMoney FT.com - SSE:LSE P/E ratio of SCOTTISH&SOUTHERN ENERGY on Google Finance Dividend yield SCOTTISH&SOUTHERN ENERGY on Morningstar Dividend SCOTTISH&SOUTHERN ENERGY on MSN Money Dividend SCOTTISH&SOUTHERN ENERGY on Reuters SCOTTISH&SOUTHERN ENERGY dividend GB0007908733 1606.00   66.3 24.51 84.20 5.24
    VODAFONE GROUP P/E of VODAFONE GROUP on Bloomberg Quote of VODAFONE GROUP on CNNMoney FT.com - VOD:LSE P/E ratio of VODAFONE GROUP on Google Finance Dividend yield VODAFONE GROUP on Morningstar Dividend VODAFONE GROUP on MSN Money Dividend VODAFONE GROUP on Reuters VODAFONE GROUP dividend GB00B16GWD56 194.55   0.0 -3.47 10.19 5.24
    ADMIRAL GROUP P/E of ADMIRAL GROUP on Bloomberg Quote of ADMIRAL GROUP on CNNMoney FT.com - ADM:LSE P/E ratio of ADMIRAL GROUP on Google Finance Dividend yield ADMIRAL GROUP on Morningstar Dividend ADMIRAL GROUP on MSN Money Dividend ADMIRAL GROUP on Reuters ADMIRAL GROUP dividend GB00B02J6398 1298.00   13.6 94.86 66.80 5.15
    NATIONAL GRID P/E of NATIONAL GRID on Bloomberg Quote of NATIONAL GRID on CNNMoney FT.com - NG.:LSE P/E ratio of NATIONAL GRID on Google Finance Dividend yield NATIONAL GRID on Morningstar Dividend NATIONAL GRID on MSN Money Dividend NATIONAL GRID on Reuters NATIONAL GRID dividend GB00B08SNH34 836.00   13.3 62.29 40.85 4.89
    BAE SYSTEMS P/E of BAE SYSTEMS on Bloomberg Quote of BAE SYSTEMS on CNNMoney FT.com - BA.:LSE P/E ratio of BAE SYSTEMS on Google Finance Dividend yield BAE SYSTEMS on Morningstar Dividend BAE SYSTEMS on MSN Money Dividend BAE SYSTEMS on Reuters BAE SYSTEMS dividend GB0002634946 414.10   12.7 32.62 19.50 4.71
    LEGAL & GENERAL P/E of LEGAL & GENERAL on Bloomberg Quote of LEGAL & GENERAL on CNNMoney FT.com - LGEN:LSE P/E ratio of LEGAL & GENERAL on Google Finance Dividend yield LEGAL & GENERAL on Morningstar Dividend LEGAL & GENERAL on MSN Money Dividend LEGAL & GENERAL on Reuters LEGAL & GENERAL dividend GB0005603997 180.00   13.4 13.66 7.65 4.25
    STANDARD LIFE P/E of STANDARD LIFE on Bloomberg Quote of STANDARD LIFE on CNNMoney FT.com - SL.:LSE P/E ratio of STANDARD LIFE on Google Finance Dividend yield STANDARD LIFE on Morningstar Dividend STANDARD LIFE on MSN Money Dividend STANDARD LIFE on Reuters STANDARD LIFE dividend GB00B16KPT44 408.40   14.0 29.39 14.70 3.60
    ASTRAZENECA P/E of ASTRAZENECA on Bloomberg Quote of ASTRAZENECA on CNNMoney FT.com - AZN:LSE P/E ratio of ASTRAZENECA on Google Finance Dividend yield ASTRAZENECA on Morningstar Dividend ASTRAZENECA on MSN Money Dividend ASTRAZENECA on Reuters ASTRAZENECA dividend GB0009895292 3428.00   11.4 299.00 119.00 3.47

    RESOLUTION - RSL.L  


    		 NYSE US 100  
    Other articles featuring Resolution (RSL.L):
    -3 More FTSE 100 Shares Going Ex-Dividend Next Week
    -3 FTSE Dividends Lifted This Week
    -Resolution Limited Lifts Dividend By 6% to Yield 7.7%
    -Last Month's 2.8 Billion Pound FTSE Dividend