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Why You Shouldn’t Be Fooled By These High Yielders: J Sainsbury plc, Petrofac Limited And United Utilities Group PLC

Photo credit: Elliott Brown. Licence: https://creativecommons.org/licenses/by/2.0/

Today I am looking at three FTSE stocks in danger of disappointing dividend hunters.

J Sainsbury

The exhausting effect of prolonged discounting across the UK grocery sector finally caught up on Sainsbury’s (LSE: SBRY) last year. The business reported this month that profits slipped for the first time in a decade for the year ending March 2015, with underlying pre-tax profit dropping 14.7% during the period to £681m.

Like-for-like sales slumped 1.9% during the year, and with the competition upping the ante I believe the bottom line at Sainsbury’s is set to endure further hardships ahead. Indeed, these pressures have forced the supermarket into significant capex reductions and cost-cutting to shore up the balance sheet, and desperate cash conservation also forced the grocer to slash full-year dividend by almost a quarter, to 13.2p per share.

And the City does not believe that the troubles are over there, with Sainsbury’s anticipated to reduce the payout to around 10.5p per share in fiscal 2016 amidst a predicted 20% earnings slide. Dividends are expected to remain around this level in 2017, too, amidst forecasts of a 3% bottom-line dip.

With the supermarket nursing a colossal net debt pile of £2.3bn, and sales failing to show any meaningful improvement despite extensive price reductions, it is hard to see the dividend picture over the at the London firm improving any time soon.

Petrofac Limited

Due to persistent difficulties in the energy sector I reckon Petrofac (LSE: PFC) is a dicey pick for income chasers. The company — which builds infrastructure for the oil and gas markets — warned last month that industrial action and poor weather in the Shetlands will result in a further $195m pre-tax loss at its Laggan-Tormore project, adding to the $230m hit already booked on the project.

This is the latest of a spate of profit warnings announced over the past year, and I expect the situation to get even worse at Petrofac as fossil fuel producers across the globe batten down the hatches and reduce investment in new hardware. Consequently the business is expected to clock up a 39% earnings slide in 2015, according to City analysts, following on from last year’s 11% drop. This result is expected to force Petrofac to slash the dividend to 61.2 US cents per share from 65.8 cents in 2013 and 2014.

On the bright side, such a projection still creates a mighty 4.5% yield. And a predicted 59% earnings bounce next year is expected to push the dividend to 62.9 cents, nudging the yield to 4.6%. However, I believe that such forecasts are eye-poppingly optimistic given that resilient oil pumping across the globe threatens to put the kibosh on any sustained recovery in the black gold price. As a result I believe Petrofac is a risk too far at the present time.

United Utilities Group

It is becoming abundantly clear that regulatory pressures could significantly compromise profitability for water suppliers such as United Utilities (LSE: UU). Governing body OFWAT announced plans late last year to reduce the amount companies can charge customers, and is tipped by many to impose further measures over the next 12 months as it seeks a radical overhaul of the sector to improve consumer confidence and industry transparency.

The City currently expects United Utilities to book a 12% earnings gain in the year ending March 2015, propelling the total dividend to 37.7p per share. And even though earnings are expected to slip 12% and 3% in 2016 and 2017 correspondingly, the water provider is expected to keep its progressive policy rolling with rewards of 38.4p and 39.4p for these years. These numbers create bumper yields of 3.9% and 4%.

But given the chronic uncertainty swirling around the future profitability of the sector’s major players, I believe that such projections are speculative at best. And with dividend coverage at United Utilities ringing in at 1.1 times through to the close of next year — well below the safety barometer of 2 times — I reckon current forecasts are built on very fragile ground.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK owns shares of Petrofac. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.