Stewart: Run of divi cuts has bottomed

RENOWNED equity analyst Alex Stewart has urged income investors to stop focusing on avoiding stocks they fear will cut their dividends in the recession, as the cycle of dividend-cuts begins to slow.

Stewart, who recently joined Evolution Securities from Dresdner, said income investors should instead focus on stocks that look likely to be able to live up to their dividend promises under a “stress test” scenario.

To illustrate this, he has issued a top-20 list of income-focused UK blue chip companies showing how many times their expected earnings this year cover their current dividends, after subjecting the earnings to a 10 per cent “stress test” reduction.

The best-ranked firms are the most likely to earn enough to continue paying dividends at their current level, even if earnings fall 10 per cent below current estimates.

Stewart’s list also illustrates dividend cover in 2010, after subjecting earnings estimates for next year to a more gruelling 20 per cent stress test.

That ensures firms with “secure payments in the short term”, who are “medium-term dividend-growth candidates” are shown, said Stewart.

Top of Stewart’s list is Stagecoach, the bus, rail and tram operator, with a healthy 2.8x cover on its 2009 dividend under the stress test. Aerospace group Meggitt may appeal to longer-term investors, with a 2.5x 2009 dividend cover and strong 2.2x 2010 cover.

He added that while bondholders get coupon payouts and banks get interest on debt, equity holders are providing emergency funds via rights issues but also taking dividend cuts.

“I argue the opposite should be true. If equity investors are going to be the lender of last resort then they should demand a re-payment schedule,” he said.