Are Rio Tinto plc & Centrica PLC The FTSE 100’s Worst ‘Big Yielders’?

Royston Wild explains why Rio Tinto plc (LON: RIO) and Centrica PLC (LON: CNA) are likely to disappoint dividend hunters.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Today I am looking at the dividend prospects of two battered FTSE 100 giants.

Dig elsewhere

Diversified mining colossus Rio Tinto (LSE: RIO) has already fired a warning shot for those seeking chunky dividends in 2016 and beyond.

The London-based business announced in February that the commodities sector’s murky outlook will put paid to the steady payout increases of previous years. Indeed, Rio Tinto noted that “maintaining the current progressive dividend policy would constrain the business and act against shareholders’ long-term interests“.

Rio Tinto said that it expects to pay a dividend of at least 110 US cents per share in 2016 as a result, down markedly from the 215-cent reward of last year. In line with this statement, City brokers expect the mining giant to fork out a dividend of 127 cents this year, a figure that yields a splendid 4.6%. However, I believe that these forecasts are built on shaky ground.

First of all, Rio Tinto is expected to nurse a third successive earnings dip in this year, a 49% reduction resulting in earnings of 127 cents per share is forecast, matching the predicted payout. Obviously this leaves little margin for error should commodity prices fail to recover — indeed, copper and oil values have resumed their downtrend in recent days as supply/demand fears have reared their head again.

And Rio Tinto cannot rely on a robust balance sheet to relieve its murky earnings outlook, either. The company saw net debt rise to $13.8bn as of December, up 10% from the same point in 2014.

With Chinese metal imports likely to keep falling amid painful economic rebalancing, and producers of key commodities continuing to swamp the market with unwanted material, I reckon dividends at Rio Tinto could keep on falling well beyond this year.

Don’t get burned

Like Rio Tinto, energy giant Centrica (LSE: PLC) also remains at the mercy of worsening commodity markets — the firm’s Centrica Energy arm saw operating profit slump by almost two-thirds in 2015 as revenues lagged. And the company is also being put on the back foot by the rise of cheaper, independent suppliers across its retail operations.

Centrica was forced to slash tariffs at its British Gas division twice in 2015 in order to maintain market share, and was forced to cut gas prices again — this time by 5.1% — in February. And the company should be braced to make further reductions as UK consumers become increasingly receptive to switching suppliers.

These pressures have already forced Centrica to reduce the dividend in each of the last two years in line with falling earnings. But although a further reduction is anticipated in 2016 — this time by a hefty 12% — the City expects Centrica to lift the dividend to 12.2p per share from 12p last year.

Still, investors should not be drawn in by the monster 5.6% yield, in my opinion. Not only is the predicted payment covered just 1.2 times by prospective earnings, but news that Moody’s is considering downgrading Centrica’s credit rating underlines the firm’s poor financial health.

Until revenues pressures begin to ease, I believe that dividends could continue to recede at Centrica in the near-term and beyond.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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

More on Investing Articles

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »