Yesterday’s shocking profit downgrade by one of Australia’s largest insurer and wealth management groups, AMP (ASX: AMP), sent investors rushing for the exits. While the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) lost 1.5%, AMP shed over 12.8% of its value.
Today, the Australian Financial Review reports that some broking analysts are questioning whether the downgrade, which amounted to roughly a 13% reduction in forecasts, will force the company to lower its dividend.
It appears this view is based on the company maintaining a 75% payout ratio. Depending on capital requirements within its insurance division however, there could be scope to raise the payout ratio and continue to pay a 12.5 cent dividend.
AMP is currently trading on a 5.8% dividend yield, which is the highest yield compared with its listed peers. Suncorp Group (ASX: SUN) and Insurance Australia Group (ASX: IAG) are trading on forecast yields of 5.6% and 5% respectively.
With the downgrades continuing across the market, investors need to pay particular attention to the sustainability of dividends. As share prices fall, dividend yields may look more attractive, however if the falling share price is followed by a cut to the dividend, then that high yield will soon disappear.
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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.