Panmure Gordon picks out "most vulnerable" UK dividends

Panmure Gordon has warned of "storm clouds on the horizon" for income investors as corporate payouts reach "unsustainable" levels and has picked out several FTSE 350 companies where dividends appear particularly vulnerable.

Although the UK economy has begun 2015 in rude health, the broker pointed out that twelve-month forward dividend cover across UK equities recently fell to levels last seen in 1999 and 2009 when they slid off the back of severe earnings downgrades.

"Should equities face a similar challenge in 2015 the starting point for income stocks is now worryingly weak," wrote analyst Simon French.

He said recent cuts to the dividends on offer in the oil & gas and food retail sectors should alert investors to the "precarious nature" of some of the pay-outs being offered elsewhere in the event of potential earnings downgrades.

With uncertainty about the end to zero interest rate policies, high public sector leverage, the end of the commodity super-cycle and the low growth patterns becoming entrenched in the Eurozone and Japan, he said he believed "the balance of risks are currently weighted to the downside" and cited the poet Robert Burns in saying “suspense is worse than disappointment”.

To alleviate such suspense, French encouraged investors to position for a return to more volatile trading conditions by challenging "the resilience of forward income assumptions in their portfolio".

He assessed the dividend vulnerability of all UK stocks on the main market to downward revisions in their future earnings, ranking each with a "vulnerability factor" measured as a company's income sustainability to an earnings downgrade.

Most vulnerable dividends to potential earnings downgrades

Among oil & gas and industrials, most vulnerable were said to be BG Group, Tullow Oil, Petrofac, BHP Billiton, Anglo American, Vedanta Resources, BAE, Cobham, Kier and Xaar.

Among support services, consumer goods and healthcare, the analyst cited RPS Group, GlaxoSmithKline and Coca-Cola HBC.

Sifting through the consumer services, telecoms and utilities sectors, Dunelm Group and Centrica are seen as most vulnerable, with Helical Bar in property, and Telecity and Fidessa in technology.

Most resilient dividend prospects

On the other side of the coin, Johnson Matthey and British Polythene Industries are seen as having solid dividend prospects, according to French.

Among support services, consumer goods and healthcare, the chosen few are VP, Hays, Stock Spirits Group, Greencore Group, Spire Healthcare and Redrow.

In the consumer services, telecoms and utilities sectors, Panmure views the most resilient payouts at Findel, Euromoney Institutional Investor, Whitbread, Cineworld, First Group.

For real estate, Great Portland Estates and Unite Group are backed, with BT Group among top telecoms stocks.