A wave of dividend cuts could send the FTSE 100 crashing to 5,000!

This time last year, UK investors were celebrating as the FTSE 100 (INDEXFTSE: UKX) hit an all-time high off the back of improving growth prospects and positive market sentiment. However, over the past 12 months, the index has gone nowhere but down. Since 11 May 2015, the FTSE 100 has lost 12.6% excluding dividends.

Unfortunately, there could be further declines to come if a new report from Canaccord Genuity is to be believed. Canaccord’s analysts believe that a significant number of FTSE 100 companies that could be forced to cut their dividend payouts in the near future, joining the likes of Tesco, BHP, Centrica, Standard Chartered, Barclays and Rolls-Royce all of which have already taken the axe to payouts.

Payouts are testing limits 

Canaccord’s research shows the FTSE 100’s average dividend payout ratio has passed more than 70%, meaning that for every £1 in profit generated by FTSE 100 companies, 70p is paid out to shareholders via dividends. The problem with this approach is, as we’ve seen over the past 12 months, if a company pays out the majority of its profits to investors, the business runs the risk of not having enough retained profit to weather the bad times and fund capital expenditure without relying heavily on the debt markets. Revenues are also falling across the FTSE 100, which only exacerbates the pressure on company cash flows.  

Canaccord believes that the companies most likely to cut their dividend next are Vodafone, Tate & Lyle, Diageo and Rio Tinto (again). These are some of the most dependable dividend payers in the FTSE 100 and while they don’t appear on Canaccord’s list, City analysts are also speculating that other dividend champions such as HSBC, Shell and BP could be forced to slash their payouts as well.

If these companies all decide to slash payouts around the same time, then there will be a sudden rush for the exits as income investors swap these fallen angels for future dividend stars. This heavy selling could force the FTSE 100 down to 5,000, a level not seen since 2011 when similar concerns inspired investors to take money off the table and reinvest the cash into less volatile assets.

Still, at the other end of the spectrum, companies like BT and Lloyds are increasing their dividend payouts. Although, these steady hikes are unlikely to make up for the wave of cuts that could be just around the corner.

Avoid the FTSE 100? 

So, considering all of the above it could be wise to avoid the FTSE 100 as a dividend investment in general. The index as a whole currently supports a dividend yield of 4.06% and trades at a historic P/E ratio of 32.8. On the other hand, considering the above, it might be time to pick some single name dividend stocks, which have room for steady payout growth going forward.