Question: what do Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US), Centrica (LSE: CNA) and Vodafone Group (LSE: VOD) (NASDAQ: VOD.US) have in common?
- They all offer a propective yield of around 5.7%.
- They are all near the top of my list of big cap firms that may be forced to cut their dividend payouts in the next year.
Here’s why.
Tesco
Tesco hasn’t cut its dividend in 29 years. An insider-boss, like outgoing CEO Philip Clarke, was never likely to be the one to do the deed, but incoming CEO Dave Lewis may see things differently.
Firstly, Mr Lewis will be keen to do a kitchen sink job with his first set of results, delivering as much bad news as possible, so that it can be blamed on his predecessors.
By cutting the dividend at the start of his tenure, Mr Lewis could ease pressure on Tesco’s cash flow and set the scene for a leaner future, in which the Tesco business might well shrink slightly before returning to growth.
Centrica
Centrica’s first-half operating profits fell by 35%, thanks to a mild winter. The firm has already cut its earnings forecast for this year, but as the owner of British Gas — the UK’s largest energy company — this highly-regulated firm continues to face a hostile political climate.
Although a cold winter might perk up Centrica’s 2015 profits, it won’t solve the firm’s debt problem: Centrica’s net debt rose by around 20% in 2013, and net finance costs accounted for £243m — around 10% of the firm’s operating profits.
Interest rates can only really rise from here, and when they do, Centrica’s cash flow and dividend could come under serious pressure.
Vodafone
Vodafone did well to sell its stake in Verizon Wireless for $130bn, but the loss of the US business has left a sizeable hole in the firm’s profit and loss account.
As a result, Vodafone’s commitment to dividend growth is looking rather bold — or even reckless. Consensus forecasts suggest earnings per share of 7p this year and 7.6p next year, yet the firm intends to maintain dividend growth from last year’s level of 11p.
Although I’m confident in Vodafone’s medium-term growth prospects, I think there’s at least a 50% chance that it won’t manage to sustain the current level of dividend payouts until strong new growth feeds through to the bottom line.
