Are these the FTSE 100’s dodgiest dividend stocks?

Royston Wild highlights the problems facing two FTSE 100 (INDEXFTSE: UKX) income favourites.

| 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.

A modest earnings recovery at Marks & Spencer (LSE: MKS) has enabled the retailer to crank its progressive dividend policy back into action in recent years.

The FTSE 100 (INDEXFTSE: UKX) company’s fashion woes have long been a millstone around its neck. But a rare sales improvement more recently — allied with soaring demand for its premium foods — encouraged ‘Marks and Sparks’ to feel confident enough to raise payouts again.

And the City expects Marks & Spencer to maintain this upward course. A reward of 18.7p per share in the year to March 2016 is expected to bound to 21p in the current period, yielding an impressive 6.6%.

But I believe investors should take this projection with a pinch of salt. A predicted 14% earnings slide in fiscal 2017 leaves the forecasted dividend covered just 1.4 times by earnings, some way below the safety benchmark of 2 times.

And latest trading numbers should stoke investor fears still further. M&S saw like-for-like sales of its clothing and homeware products slide 8.9% during April-June. And the firm’s rapid store expansion programme just prevented sales of its edible products from slipping into the red.

With the financial implications of Brexit also likely to put pressure on the broader retail landscape in the weeks and months ahead, I reckon those expecting chunky dividend growth at Marks & Spencer could end up bitterly disappointed.

Crude catastrophe?

The threat of sustained oversupply in the oil market also makes BP (LSE: BP) a mighty risk for dividend chasers, in my opinion.

The fossil fuel play has been able to keep payouts rising in recent times despite the impact of low crude values, its long-running asset-shedding programme, allied with a tighter chokehold on costs and reduced capital expenditure budgets, maintaining its position as a top pick for income investors.

The number crunchers believe that this trend could be coming to an end, however — a projected payment of 40 US cents per share matches last year’s dividend.

Still, many stock pickers will remain be drawn to a huge yield of 7%, a figure that trounces the FTSE 100 average of 3.5%.

But stock selectors should treat this projection with some caution. First of all, this year’s anticipated dividend smashes projected earnings of 17.5 cents per share. And net debt continues to surge — this galloped to $30.9bn as of June, up from $24.8bn a year ago.

There’s clearly only so far BP’s streamlining drive can go, not only to keep dividends rolling at market-busting levels, but also before it becomes seriously earnings destructive for the coming years.

Rather, the company needs a significant uptick in black gold values to retain its lustre as a top-tier dividend pick. But with the world already drowning in too much oil, and producers from Texas to Tehran showing huge reluctance to switch down the pumps, a chunky price push still appears some way off.

As a consequence, I reckon those seeking robust dividend potential in the near term and longer should shop elsewhere.

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 BP. 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

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

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 »