HSBC (LSE: HSBA) andCentrica (LSE: CNA) look to be two of the FTSE 100s most attractive dividend stocks. Both support dividend yields in excess of 6% and based on historic figures, these payouts are covered one-and-a-half times by earnings per share.
However, if a shares dividend yield exceeds that of the wider market, it usually signals that investors arent wholly convinced that the payout is here to stay. The FTSE 100s yield is 4.2%, so it would appear that the majority of traders and investors believe HSBC and Centrica will be forced to cut their dividend payouts in the near future.
Another cut coming?
Centrica has already cut its payout once in the past 12 months asfalling oil and gas prices hurt profits at its upstream production business. Problems with a new billing system inits British Gas Business arm have also caused problems, and this division is now expected to report a loss for the year.
Still, 2015 was something of a transformation year for Centrica. After the new CEO Iain Conn settled in, Centrica began to slash capital spending and rebalance the business away from hydrocarbon production and towards domestic energy supply.For the first six months of 2015, around two-thirds of Centricas operating profits came from the domestic supply business,a significant change from last year. This change should help stabilise Centricas earnings going forward. For 2015, the group expects to generate2bn in adjusted operating cash flow and analysts believe the company could reportbetween 1.1bn and 1.4bn in pre-tax profit, compared to1.4bn last year.
Based on managements expectation of2bn in adjusted operating cash flow for 2015 and capital spending requirements of less than 1bn, Centrica has approximately 1bn to fund the dividend. On a cash basis, Centricas full-year dividend payout of 12p per share cost the company around 320m last year.
So, based on these figures, it looks as if Centricas 6.5% dividend yield is here to stay.
Difficult to assess
The sustainability of HSBCs dividend is harder to evaluate. At first glance, the banks dividend payout is covered one-and-a-half times by earnings per share. But unlike Centricas domestic energy supply business, which is relatively defensive, HSBCs income is more unpredictable.
Indeed, HSBC depends on China and Hong Kong for a large chunk of its income and the outlooks for both is extremely unpredictable. Many analysts believe that China is heading for a hard landing, and even a small increase in loan losses for HSBC could send shockwaves across the groups balance sheet, forcing management to cut the dividend to preserve cash.
That said, HSBC has plenty of experience navigating the peaks and troughs of financial markets, so its likely that the bank has prepared for the worst. But HSBCs current dividend yield of 7.4% suggests that many market participants arent convinced that the bank is prepared for a crisis and believe there are better income stocks out there.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Centrica and HSBC Holdings. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
