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Pension Burdens & Payout Ratios

I was out walking my dog earlier (this is when I have some of my best ideas!) and as I stopped at the local garage to pick up my obligatory take away coffee I noticed a headline on the Daily Express regarding the effects for UK Pensions staying in the EU may have  all pretty unpleasant!

Now this is interlinked with a number of other issues, recent research from AJ Bell tells us that FTSE-100 Companies with pension deficits are continuing to pay out huge dividends – no doubt with one eye on supporting the share prices – take a look at the table below from this article.

dividends and deficits

But that is not the end of it as we also see that not only are firms paying huge dividends and not reducing pension deficits but they are also typically paying out a lot more than they are actually earning! This is an area that I have highlighted on many occasions; the last being back in February – this two charts show the risks of rising payout ratios and falling dividend cover.

dps

Dividend Cover and 5 Year annualised EPS growth in sharp decline

Dividend Cover and 5 Year annualised EPS growth in sharp decline

Problems with pension deficits are not confined to this side of the Atlantic and the excellent analysis of John Hussman of Hussman Funds highlights this perfectly

 

These issues coupled with the fact that the FTSE-100 reached a multi year high in 2015 means that risks are high and exit (or not) from the EU could be the trigger for more declines.


Model Portfolio

I continue to remain heavily invested in Index Linked Gilts and avoiding equities generally – not somewhere I want to be – but some are crossing my screens and I am seriously considering EasyJet at present for a number of reasons but will be holding off until after the referendum.

portfolio Jun

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