2015 saw the bonfire of the dividends, withAntofagasta,Centrica,Glencore,WM Morrison,J Sainsbury,Standard CharteredandTescoall cutting their payouts. This has left shell-shocked investors wondering which dividendwill fall next, with BHP Billitonpossibly next in line.
When a company slashes its dividend its not only your income stream that falls. The share price has a tendency to crash as disillusioned investors flee. If that worries you, steerclear of all those FTSE 100 companies offering flashy yields of 7%, 8%, 9% or more, and look for something with less sizzle but moresustainability.
Warm front
British Gas owner Centrica (LSE: CNA) showed last Februaryhow the market punishes dividend denouncers, with almost 1.2bn wiped off its share priceafter it reported a 35% slump in profits, slashed its dividend by 30% and warned of further trouble to come. The last 12 months have been tough for the stock, with itsshare price down 22% in that time, despite signs ofsuccess in its turnaround plan.
Centricaremains vulnerable to the continuing fall in energy prices after investing billions in upstream gas and power operations, while falling demand has also hit its downstream business. But it remainsa strong brand with28m customers in the UK and North America. Downstream is now the companys main focus, which looks wise asthe IEA warns that the world is swimming in oil. Exane BNP Paribas reckons the bad news is all in the share price, and at todays valuation of 10.9 times earnings it has a case. Theforecast yield for December is a healthy 5.9%, which should keep you warm while the world waits for the energysector to recover.
Parcel power
The 4.81% yield on offer at Royal Mail (LSE: RMG) looks rather humdrumas FTSE 100 yields hit dizzying heights. But with Bank of England rate setterswarning interest rates are going nowhere, this income stream still delivers. The share price is flat over the last year, but few will be complaining given the almost-12% FTSE 100 fall over the same period.
Royal Mail is battling against tough competition in the key parcels market, where ithas justabout held its own. Competition will get tougher as Amazon builds its own delivery service, which is my main worry, as theexpected decline in letter volumes isalready priced-in. The balance sheet is tight, the cash is flowing, and you can buy this defensive play at just 10 times earnings. Investors might need that discount, as future growth could be hard to come by.
The VOD squad
Vodafone (LSE: VOD) has been one of the FTSEs dividend heroes foryears. Todays yield of 5.18% still boasts plenty of muscle although inthese strange days it hardly stands out from the crowd. Worryingly, itssustainability has beencalledinto question ever since it shrank in size after selling US business Verizon. So far management has held the line, but cover has dwindled to just 0.5.
Cash flowshould pick up now the costly Project Spring overhaul is almost complete, as Vodafonecontinues to grow across Europe, the Middle East, Africa and Asia-Pacific. But the telecom sector demands heavy investment, especially if you pursuean aggressiveacquisition strategy like Vodafone. Earnings per share are forecast to rise 19% in the year to March 2017, which looks promising, but few dividends are completely reliable today, including Vodafones.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Centrica. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
