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FTSE 100 dividend stocks: is it game over for investors?

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FTSE 100 dividend stocks seemas shaky as I’ve ever seen them. Yes, the great financial crisis was bad. But dividend cuts were largely confined to a narrow range of sectors. I fear it’s different today. We’ve already seen payouts suspended across many businesses. And I’m sure there are more to come.

We’ve seen a decade in which blue-chip companies distributed hundreds of billions in cash to shareholders. The question now has to be: is it game over for investors in Footsie dividend stocks?

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Dividends and debt

I was never entirely convinced that the high yield of the FTSE 100 in recent years indicated ‘good value’. It felt more indicative of above-average risk to dividend sustainability.

For one thing, the coverage of dividends by earnings was at historically weak levels. For another, many companies had balance sheets loaded with debt. As I wrote in early February: “In some cases, they’ve upped their borrowings simply to buy back their own shares and/or support otherwise unaffordable levels of shareholder dividends.”

The International Monetary Fund said something interesting last year about a possible economic slowdown half as severe as 2008-09. It said nearly 40% of total corporate debt in major economies would be owed by companies unable to cover their interest expenses with their earnings.

It’s scary to think such a large proportion of businesses were ill-prepared for even a modest economic slowdown. Let alone for a rarer, but higher-impact risk, such as a pandemic. In downturns, over-leverage threatens not only dividends, but also the very survival of companies.

FTSE 100 dividend stocks on the rocks

A definitive corporate playbook for the times has emerged over the last few weeks. Financial guidance has been scrapped, available credit drawn-down, extreme cost-cutting implemented, and dividends suspended or reviewed.

The rash of such announcements has already included a fair number of popular FTSE 100 dividend stocks. These include commercial property firm British Land, hotel group InterContinental, and broadcaster ITV. Plus there’s retailer Kingfisher, housebuilder Persimmon, and pest control company Rentokil.

I expect many more Footsie firms to follow suit, because the world economy is being hammered by widespread lockdowns. Furthermore, no one knows the timescale for recovery. It could begin later this year. Or we could be heading into a protracted recession, particularly in the event of a second wave of the epidemic.

Whatever happens, though, I think we should assume a rebasing of the FTSE 100’s aggregate dividend. Coverage by aggregate earnings needs to be at a more robust level than it’s been in recent years. I’d also assume relatively low aggregate dividend growth in the early period of recovery. This is because many companies will be prioritising reducing debt and strengthening their balance sheets.

FTSE 100 dividend stocks: game over?

The outlook is relatively poor in the near term. However, I don’t think it’s by any means game over for investors in FTSE 100 dividend stocks. I mentioned the index’s aggregate dividend. Some companies are better placed than others to maintain a payout. If suspended, some are better place to resume it at the same level when the time comes. And among those that rebase, the level of reset will vary.

Right now, as they always should, buy-and-hold dividend investors may want to focus on companies with superior liquidity and balance sheets. In other words, the financially stronger businesses in their industries.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended British Land Co, InterContinental Hotels Group, and ITV. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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