Analysts have started to question whether Homeserve (HSV) could be next in line to either slash or suspend its dividend, following severe cuts across the insurance sector over the past few months to their shareholder rewards.

Trading is poor across Homeserve's UK business and a potential hefty fine continues to weigh over the share price as the Financial Services Authority (FSA) continues its investigation into possible mis-selling of policies to cover home emergencies like a broken boiler. The shares today fell 8.1% to 205p after Homeserve flagged further weakness in its domestic operations, triggering earnings downgrades by the analyst community.


HSV - Comparison Line Chart (Rebased to first)

Prior to today's mark downs, consensus forecasts expected Homeserve to pay a 10.9p dividend per share for the financial year to March 2013. This is 2.1 times covered by forecast earnings per share (23.4p).

Panmure Gordon said this morning that it expects to downgrade its 2013 EPS forecast from 24p to circa 23p. It says downgrades across the City could bring uncertainty about the sustainability of Homeserve's dividend which yields 5.3%, based on the latest share price and earnings forecasts.

Yet even after nudging down EPS to 23p, that still leaves the dividend cover at 2.1 times which would usually be considered safe territory. (Dividend cover below 1.5 times is when you start getting into the danger zone). We believe only a particularly large fine from the FSA would be cause to consider a temporary suspension of the dividend.

That said, the big issue is whether Homeserve can actually meet its earnings forecasts, particularly the 2014 numbers. Producing an EPS figure much lower than consensus expectations would mean a lower dividend cover, and fuel the argument that perhaps Homeserve does need to rethink the scale of its shareholder reward. Some analysts aren't forecasting any dividend growth until 2015.

Espirito Santo says the company needs to improve marketing and retention to meet future earnings expectations. At the moment, the UK business is clearly suffering because consumers don't trust Homeserve while the FSA is probing the business. This review has generated significant negative publicity and this is feeding through to its financial results.

Homeserve needs to significantly improve the number of new customer wins to hit earnings guidance. The business needs to offset the annual policy losses, where customers aren't renewing their policies. At the moment, new marketing is not effective enough to achieve this goal.

The Walsall-based group expects its UK customer base to fall to 1.9 million in 2014, from 2.7 million in 2012 and 2.25 million in 2013.

Issue Date: 22 Mar 2013