According to current City forecasts,Barclays(LSE: BARC) dividend yield is set to hit 3% this year. Furthermore, analysts have pencilled in payout growth of 31% for next year, which should leave the company supporting a dividend yield of 3.9% during 2016.
And then theresStandard Chartered(LSE: STAN), which is expected to yield 4.7% this year and 4.9% during 2016.
However, both Barclays and Standard are struggling to improve their capital ratios and hefty fines from regulators are eating into profits.
As a result, theres a very real possibility that the two banks could be forced to could cut their dividends to save cash.
Demanding a cut
Standard is actually facing pressure from its own shareholders to cut its dividend payout. And City analysts are predicting a slight reduction in the payout this year.
On average, analysts believe that the company will scale back its payout by around 10%, although this will still leave the shares supporting a yield of 4.7%. Figures suggest that the payout will be covered twice by earnings per share.
Still, some of Standards major shareholders have been pushing the bank to cut its cash dividend payout entirely.
Instead, to reduce the pressure on Standards balance sheet, major shareholders are asking the company to pay its dividend in script from in shares rather than cash.
For the time being, management has ignored these demands.
However,the economies ofsome of Standards key markets namely India,Hong Kong and Singapore are starting to slow. Additionally, bad loansfrom the banks corporate and institutional clients more than doubled in 2014.
If this trend continues, managements hand could be forced.
Cloudy outlook
Barclays dividend, on the other hand, appears safe for the time being.
The banks recovery is rapidly gaining traction and City forecasts suggest that Barclays earnings per share will jump by 35% this year. Analysts have pencilled in further earnings per share growth of 22% for fiscal 2016.
Despite these projections, however, based on past performance, Barclays wont increase its dividend payout in line with earnings growth.
For example, over the past three years Barclays annual dividend payout has remained unchanged at 6.5p per share. Over the same period, earnings per share have fluctuatedfrom 38.4p to 17.3p.
Barclays management has been retaining cash in the business to help fund rising legal costs and improve the groups capital position.
Cut unlikely
Overall, it is unlikely that Barclays will cut its dividend payout significantly. The payout is currently covered 2.9 times by earnings per share, which leaves plenty of room for manoeuvre.
Standards dividend is another matter. Indeed, Standard could be forced to cut its dividend payout by its own investors, as they push the bank to improve its capital position.
While a dividend cut would be painful in the short-term, in the long-term it could be the right thing to do. The alternatives include a rights issue or drastic restructuring.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Barclays. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
