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Thomas Moore, manager of the Elite Rated Standard Life Investments UK Equity Income Unconstrained fund, has expressed concern that the UK stock market is under threat from large companies increasingly using debt to pay their dividends.
In an interview in Financial Adviser, a trade publication, he said that over the past five years there has been a trend of weakening company earnings and the dividends of the UK’s larger companies in particular are coming under pressure.
Thomas said the companies suffering most in this respect include those in the food retailing, mining, banks and industrial sectors, but that it could spread further. Oil companies, for example, are often reliant on future earnings to pay dividends and are not necessarily generating enough cash to cover their payment at the moment.
He has taken steps to avoid this by investing more in medium and smaller-sized companies.
Michael Clark, manager of Elite Rated Fidelity Enhanced Income, is also concerned about some of the UK’s biggest companies. He says: “There are still clear concerns over the dividend outlook for some of the larger constituents in the FTSE All Share. Given the importance I place on dividend sustainability, I have been happy to be largely out of this area – the wider oil and gas sector remains one of the largest underweights in the Fidelity Enhanced Income fund, for example.
“Instead, I have remained focused on large-cap defensive businesses that strike a good balance in terms of cash flow versus capital spending and dividends. Looking at the market today, I believe the sectors which best embody this, and offer sustainable dividend growth potential, are pharmaceuticals, fixed-line telecoms, consumer goods and selected utilities.
“The size and scope of the UK market means there are also selective opportunities further down the market cap range and in recent months I have been increasingly looking towards quality medium-sized stocks to provide income.”