Engineering group GKN (GKN) is unearthing further asset black holes in its aerospace division, putting its dividend under serious threat.

The FTSE 100 company has been a consistent income payer for investors since the financial crisis of 2007. In that 10 year period GKN has paid out around £1.1bn to shareholders through dividends, with payouts increasing every year during that spell.

‘It numbers among one of the most reliable dividend payers in the UK market, ranking 81st in the list of top payers for its £152m distribution on last year’s earnings,’ says Justin Cooper, chief executive of Link Market Services, which monitors UK dividend trends.

Axe hangs over payout

This full year to 31 December 2017 GKN had been forecast to hand around £160m to shareholders as dividends. The company announced a 5% increase in its interim payout to 3.1p in July.

‘We expected a final dividend of close to £106m to be paid in May next year,’ explains Cooper. ‘But its recent profit warning and rocketing losses in its US aerospace division mean that payout now looks under threat.

‘A new CEO may well choose to reset the clock,’ the Link Market Services boss says.

He is not alone in anticipating a dividend cut. In a note entitled ‘CEO designate has gone, dividend will be next,’ Panmure Gordon analyst Sanjay Jha predicted that the second half payout would be axed entirely.

Over-optimism

GKN provides engineering expertise and products to the automotive and the aerospace industries. Its US aerospace divisional management have significantly over-egged demand for spares on several long-running programmes.

The issues first came to light last month, but further internal investigation has revealed much bigger problems than originally thought. GKN is estimated to hold around £1.5bn worth of aerospace inventory across its global operations, but some of that kit may now not be sold.

The company thinks it will have to write off between £80m and £130m of inventory assets, as one analyst puts it, ‘a magnitude greater than the £15m announced with the earlier warning.’

GKN shares have sunk from 352.8p to 301.8p since mid-October 2017.

These issues have led to the immediate exit of GKN’s aerospace chief Kevin Cummings. This is a major shock as Cummings had been the company’s CEO in-waiting following September’s retirement announcement by current CEO Nigel Stein. He’s due to stand down at the end of this year.

In the meantime, non-executive director Anne Stevens will act as interim CEO until a successor to Stein is appointed.

An opportunity to reset expectations looks likely but investors should watch from the sidelines for now.

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