The UK stock market is an “over-leveraged disaster” according to Societe Generale
The UK equity market has been a "disaster for the best part of a decade" and is dangerously "over-leveraged" according to analysts at Societe Generale.
The investment bank issued a hard-hitting note this afternoon warning that firms may be paying out dividends at an unsustainably high rate, and said this was coming at the expense of capital investment.
"The UK equity market is over-leveraged, over-distributing and dramatically cutting capital expenditure," said Andrew Lapthorne, head of quantitative equity research at Societe Generale.
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"We have highlighted before how UK leverage ratios have skyrocketed to historical highs and how it was becoming increasing difficult to find stocks with above market dividend yields. We now add dividend cover to this worry list, with the payout ratio looking extremely precarious," he said.
After taking account for capital depreciation, firms on the FTSE 350 index are paying out 100 per cent of their cashflow in dividends, Societe Generale calculated. The oil and gas sector was cited as "clearly a problem" as income has shrivelled in the face of the plunging oil price, "but the situation excluding energy is just as troubling."
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In response to weaker performance but a determination to maintain dividend payments, some firms have turned to issuing shareholders "scrip" – where dividends are given to investors as new shares rather than a direct cash payout.
"Small mercies, the UK is not doing debt-funded share buybacks to the extent of the United States," Lapthorne concluded.
The warning comes as new analysis out today showed that profits on the FTSE 350 fell to their lowest level since before the financial crisis.