Megacaps Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US), GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) and BHP Billiton (LSE: BLT) are among the most prodigious cash-generators in the FTSE 100.
Together, the three firms are set to dish out £15bn of dividends to shareholders this year.
Not only is the gross payout figure mind-bogglingly huge, but also, with the shares of all three companies trading around 52-week lows, the yields on offer to investors today are of mammoth proportions.
BHP Billiton
BHP Billiton’s shares were making highs of above £20 last summer, but we’ve seen them below £13 on occasions in recent months. The mining giant is expected to pay a dividend of around 80p for its financial year ending 30 June. That gives a yield of 6.15% at a share price of £13.
Of course, over-supply and low prices in the mining sector are hurting BHP Billiton’s earnings at the moment, which means dividend cover is falling significantly: cover of just 1.15 times is forecast for the current year. Nevertheless, management is sticking to its “progressive” dividend policy. That’s somewhat surprising, because even a flat dividend next year would be uncovered by forecast earnings.
However, BHP Billiton has some flexibility to continue paying a dividend through the trough of the earnings cycle, by managing the business to maximise cash flow and increasing borrowings for a period, if necessary.
Royal Dutch Shell
Mining isn’t the only area of the resources sector seeing over-supply and low prices. The same is true for oil. Shares of supermajor Royal Dutch Shell were trading above £25 last summer, but have recently dipped below £19, which is a level not seen since 2011.
Shell intends to maintain its dividend at $1.88 (about 123p) a share this year — and to pay “at least that amount” in 2016 — giving a yield of 6.5% at a share price of £19. Earnings forecasts give skinny dividend cover of 1.05 for this year. However, analysts expect a healthy improvement in Shell’s bottom line next year, which would lift cover to 1.4.
Furthermore, Shell’s agreed takeover of BG Group bodes well for the longer-term future.
GlaxoSmithKline
Pharmaceuticals giant GlaxoSmithKline isn’t exposed to the great macro trade winds that propel or pull back the earnings of resources companies, such as BHP Billiton and Shell. However, the pharma sector has had pressures of its own in recent years with governments tightening health budgets, a spate of patent expiries and competition from generic drugs.
Glaxo’s earnings have fallen for the last two years, and the company has recently decided to peg its dividend at 80p a year for 2015-17. The company has also dropped a previous plan for an c. 80p capital return to shareholders this year in favour of a c. 20p special dividend.
Glaxo’s 80p ordinary dividend gives a yield of 5.8% at current share-price lows of under £14, compared with highs of above £16 as recently as April. This year’s dividend could be only just covered by earnings. However, the earnings decline is expected to bottom out, with double-digit growth for 2016, lifting dividend cover to 1.1 times. Glaxo has also guided on mid-to-high single-digit earnings growth through to 2020. That would be capable of supporting a return to above-inflation dividend increases and strengthening dividend cover.
Looking to the long term
Earnings of these three companies are currently at a low ebb, and myopic Mr Market has pushed their share prices down and lifted their dividend yields up. Of course, there are always risks in taking a contrarian position, but going against the herd can reap big rewards.
I believe the long-term prospects for Billiton, Shell and Glaxo are such that backing them today — while their shares are depressed and their yields high — could pay off handsomely in the decades to come.
