Pay-out ratio exceeds net profits in FTSE 100 companies

Blue Chip companies are currently paying out more than their net profits, according to data compiled from all 100 companies in the FTSE index.

The pay-out ratio for FTSE 100 companies is currently 107 percent, meaning that dividend pay-outs are exceeding the net profits. As an index, retained earnings are being used to fund dividend payments to shareholders; although this is manageable in the short term, this cannot continue in perpetuity and unless earnings increase markedly soon, the chance of dividend cuts will increase.

By studying the breakdown of pay-out ratios (below), you will see this issue is particularly prevalent for a handful of companies – investors in other companies have nothing to worry about.

The FTSE 100 is heading into overbought territory

According to the relative strength index technical indicator, the FTSE 100 is in overbought territory which is seen by some technical analysts as a sign of a potential reversal.

A reading of over 70 is classed as overbought and at the time of writing, the 20-period RSI for the FTSE 100 is 65.4.

The US is in an earnings recession

As the name suggests, an earnings recession is a reduction in the overall profit of a countries listed companies. We take the US benchmark, the S&P 500, to demonstrate how earnings are slowly deteriorating, despite a supposedly improving economy.

Notwithstanding the fact that lower earnings will ultimately lead to stagnant or reduced shareholder pay-outs, investors may increasingly concerned that the valuation of the index leaves very little room for multiple expansion at current levels and if earnings continue to fall, share prices may not be far behind.

The S&P 500 inflation adjusted Shiller PE Ratio (CAPE) is at the highest level since December according to data on Multpl.

source: Sharescope

Data presented may contain rounding and other inaccuracies and shouldn’t be relied upon for investment decisions.

Miranda Wadham on 10/08/2016