We live in an era of crazy yields. Right now, I can count 18 companies on the FTSE 100 yielding 5% or more. Crazier still, eight stocks yield more than 8%, most of them oil andcommodity stocks. Although that number will shortly fall, with Anglo American,Glencoreand Standard Charteredhaving already announced that they will be axingtheir dividends, and others may follow.
Aberdeens Anguish
Fund manager Aberdeen Asset Management (LSE: ADN) belongs to the 8% club, currently yielding 8.36%. It endureda rough 2015, which saw its share price crash 40% as the emerging markets (in which it specialises in) stumbled and fell one by one. This years China-fuelled market rout is making for an even rough 2016, having already knocked18% of the share price since 4 January, taking it to todays 233p.
Aberdeen was also hit by a downgradefrom Barclays that reflected the pressure the company is under, as it warned of further 20n of investor outflows, on top of the 34bn suffered lately. Barclays also predicted a 13% decline in revenues, and 25% drop-off in earnings per share.
Emerging Misery
As I write this, Chinese stock markets are plungingagain, but given recent heavy losses existing Aberdeen investors will be reluctant to sell at todays prices. Yet management is standing by the dividend for now, bolstered by a year-end net cash position 568m. The cover is a decent 1.6, which should help management maintain the payoutfor now.
Further weakness couldlead to renewed takeover talk, which might offer some share price respite. Existing investors should shut their eyes and think of the yield. Prospective buyers tempted by its valuation of just 7.94 earnings must accept that things could get far worse before they get better.
How Low Can Oil Go?
Oil major BP (LSE: BP) has been surprisingly resilient this year, falling around 2% to 340p. That is quite astonishing, assuccessive analysts talk down the oil price to $20 a barrel (Morgan Stanley) $16 (RBS) and now $10 (Standard Chartered). There seemsno end in sightfor the the oil price rout, with prices collapsing by more than 15% this year alone. So why has BPs share price held firm?
Fellow FTSE 100-listed oil giant Royal Dutch Shell has been hit much harder, with its stock down 12% this year to todays 1,353p. Investor confidence in BP may have been bolstered by itsrobust response to todays troubles, having just announced 6,000 job cuts in its global production division, as it looks to reduce the upstream headcount to below 20,000 by the end of the year.BP insists that it remainscommitted to the North Sea,investing around $2bninto North Sea projects and a further $2bn into its running our North Sea operations.
With oil hitting new lows by the day, and dividend coverreduced to a threadbare 0.5, that8.1% yield looksin growing peril. A cut would sink investor confidence, which would drivedown the share price as well. Management is resolved to protect the dividend, but 2016 will test its resolveto the max.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Aberdeen Asset Management and Royal Dutch Shell. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.