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Forget The Analysts: Why Dividends At BHP Billiton plc, Centrica PLC & J Sainsbury plc Look Destined To Disappoint

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Today I am looking at three stocks I expect to disappoint income-hungry investors.

BHP Billiton

Unlike the City’s band of calculator bashers, I am convinced that BHP Billiton (LSE: BLT) will be forced to slash the dividend sooner rather than later. While it is true the mining giant has traversed previous periods of earnings weakness to keep the payouts moving higher, the crushing effect of production ramp-ups in recent years threatens to deliver a hammerblow to the digger’s financial health.

Indeed, expectations of steadily-weakening commodity prices is predicted to drive earnings 44% and 27% lower in 2015 and 2016 respectively, to 143 US cents and 105 cents. Still, the City believes BHP Billiton’s progressive payment policy will continue steaming along, and a dividend of 121 cents in 2014 is predicted to rise to 124 cents this year and to 128 cents in 2015. These forecasts create juicy yields of 5.8% for this year and 6% for 2016.

I am not so convinced, however, firstly because the 2015 dividend is covered just 1.2 times by predicted earnings — well below the safety standard of 2 times — while next year’s projected payment actually outstrips the dividend. With new capacity threatening to keep outstripping demand across many of BHP Billiton’s raw material markets for many years to come, I expect the balance sheet to buckle despite the effect of cost-cutting activity and potential for further divestments.

Centrica

The rising pressure facing Britain’s utilities providers like Centrica (LSE: CNA) is certainly no secret, with parties across both sides of the House — not to mention regulators, consumer groups and the media — putting the profitability of such companies firmly under the microscope. All the while speculation is mounting that the UK’s energy operators could face harsh measures to crimp the amount they charge households.

On top of this, Centrica — unlike most of its industry peers — is facing the problem of subdued crude prices on the profitability of its upstream operations. Operating profit here slumped 44% in 2014, and although Brent prices have recently recovered around the $65 per barrel mark, a worsening supply/demand imbalance threatens to keep revenues under the cosh.

The City has already baked these problems into its forecasts somewhat, and Centrica — which cut the dividend to 13.5p per share in 2015 from 17p the previous year — is anticipated to initiate yet another cut, this time to 12p. But with dividend cover running at just 1.5 times for this year, and the energy play’s vast investment programme threatening to push colossal debt levels still higher, I reckon Centrica’s 4.6% yield for this year is overly-flattering.

J Sainsbury

Battered grocery institution Sainsbury’s (LSE: SBRY) has also been in the doghouse with income chasers in recent times. The effect of persistent earnings pressure forcing the business to slash the payout in May — a full-year dividend of 13.2p per share for the period ending March 2015 was down almost a quarter from the previous year — and I believe further underperformance at the till should send payments rattling still lower.

Sainsbury’s said that it intends to keep dividends covered at least twice by earnings for the next three years. But with this month’s trading statement illustrating yet more sales weakness — like-for-like sales drooped 2.1% during April-June — the prospect of collapsing earnings dragging dividends with it is a very real possibility. And when you take the supermarket’s hefty £2.3bn net debt pile into account, suddenly Sainsbury’s looks like a precarious dividend selection.

It is true that the City expects another double-digit earnings drop in 2016 to push the dividend lower again, to 10.3p. This still yields an attractive 3.9%, however, comfortably beating the market average. But should the bottom line dip bigger than expected, a very real scenario as Aldi and Lidl’s market grab lingers on, then the London firm could reduce the dividend much greater than forecast.

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