Electricity plays dividends set to dim?
Power play Centrica (LSE: CNA) shook the City last week by electing to slash the dividend for the first time in its history.
Crimped by reduced revenues at its British Gas retail arm, Centrica saw adjusted operating profit slip by more than a third to 1.7bn, prompting the supplier to cut the full-year payout for 2014 by 21% to 13.5p per share. Centrica cited the need to bolster its cash position, as well as to maintain a strong credit rating, as the reasons behind the move.
Clearly a number of parallels can be made between SSE and its industry rival. In the face of mounting regulatory pressure and intense competition, the business was forced to cut its tariff 4.1% in January, following hot on the heels of Centrica and its major rivals. SSE will hope the move will help to stop the bleeding across its customer base, which slumped to 8.71m as of the end of 2014 from 9.1m at the end of March.
On top of this, SSEs balance sheet is also coming under increasing stress, withcash and cash equivalents slumping by more than half as of the end of September, to 244.4m.
And with SSE unlikely to be able to raise prices any time soon in the current climate, shareholders could see payouts come under the cosh this year and beyond.
The number crunchers expect the company to increase the total dividend in the year to March 2015, however, to 89.1p per share from 86.7p last year, creating a yield of 5.8%. A further hike to 91.9p is estimated for fiscal 2016, producing a 6% yield.
But with the bottom line expected to fall 4% and 3% in 2015 and 2016 correspondingly, prospective payments are covered just 1.3 times by earnings, some way short of the security benchmark of 2 times. Although SSE reiterated its intention to deliver a full-year dividend increase of at least RPI inflation just last month, the possibility of prolonged earnings weakness could put paid to this strategy.
Dont bank on payout resumption any time soon
With Royal Bank of Scotland expected to throw up its first profit since the 2008/09 financial crisis in 2015, the City expects the firm to consequently crank its dividend policy back into action. A token payment of 1.6p per share currently chalked in for this year, and payments are expected to stride higher in 2016, with a predicted total dividend of 11.1p carrying a yield of 2.8%.
However, the Royal Bank of Scotland faces a number of challenges which could prevent it from realising these projections. Firstly, the threadbare state of the banks balance sheet was exposed in November when it scraped past the European Banking Authoritys stress tests with a capital ratio of 5.7%, marginally beating the regulators target of 5.5%.
Clearly Royal Bank of Scotland has a seriousneed to bulk up its cash pile, but it faces a number of problems that could undermine these efforts. The firms restructuring drive continues to eat up capital, while it also faces further impairments and mounting legal penalties as well as having to shell out vast sums relating to the mis-selling of PPI, the company also faces claims that it misled investors over a 2009 rights issue, as well as accusations that it wrongly sold mortgage-backed securities in the US.
The scale of the banks asset-shedding is also casting doubts over the companys earnings, and consequently dividend, outlook. With its core operations continuing to struggle, Royal Bank of Scotland is expected to see earnings slip 16% this year and 1% in 2016. I believe the prospect of further bottom line pain can be expected in the coming years as revenues struggle to kick into gear.
So if you are looking for firms with more robust dividend outlook than those above, I strongly recommend you check out this brand new and exclusive report identifies a wide range of big-cap winners primed to turbocharge your investment income.
Our “5 Dividend Winners To Retire On” wealth report highlights a selection of incredible stocks with an excellent record of providing juicy shareholder returns. Among our picks are top retail, pharmaceutical and utilities plays that we are convinced should continue to provide red-hot dividends. Click here to download the report — it’s 100% free and comes with no further obligation.
Get FREE Issues of The Motley Fool Collective
Get straightforward advice on whats really happening with the stock markets, direct to your inbox. Help yourself with our FREE email newsletter designed to help you protect and grow your portfolio wealth.
By providing your email address, you consent to receiving further information on our goods and services and those of our business partners. To opt-out of receiving this information click here. All information provided is governed by our Privacy Statement.