Are these dividend stocks about to fail their shareholders?

Royston Wild looks at two dividend shares with less-than-convincing investment potential.

| 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.

The trading update last month from Pearson (LSE: PSON) provided its shareholders with a pre-Halloween fright. The textbook writer advised that total sales had declined 7% during the first nine months of 2016, including a catastrophic 9% decline in North America, Pearson’s largest market.

As well as having to endure “declines in assessment revenues in the US and UK,” the publishing giant also saw “declines in North American Higher Education courseware due to a further inventory correction by retailers in July and August.”

Despite these issues, the City expects Pearson to keep the full-year dividend locked around 52p per share through to the close of 2017, putting paid to its progressive payout policy but still creating a market-busting 6.9%.

Many income hunters will be encouraged by these forecasts, though I reckon shrewd stock pickers should steer clear. Pearson carries meagre dividend coverage of 1.1 times and 1.2 times for 2016 and 2017 respectively, some way below the widely-regarded ‘security’ watermark of two times.

And Pearson has seen debt levels explode in recent months. Net debt surged from £654m at the start of 2016 to £1.37bn as of September, the uptick reflecting the payment of dividends, currency movements, restructuring costs and contributions to the Pearson pension fund.

With Pearson battling a worsening balance sheet and massive structural changes to its key markets, I reckon the firm’s record of offering chunky dividends may about to be consigned to history.

Another dicey dividend pick

Fossil fuels colossus BP (LSE: BP) could also see its prestigious dividend scheme put to the sword should crude values fail to meaningfully recover.

Like Pearson, the number crunchers expect hulking debt levels and an uncertain revenues outlook to prompt BP to keep the dividend locked for the foreseeable future. Still, forecast dividends of 40 US cents per share through to the end of 2017 yield a very tempting 6.7%.

But BP’s $32.4bn net debt mountain (as of September), as well as expectations of earnings per share of just 18 cents this year and 42 cents in 2017, should raise serious concerns over these estimates being met. The crude colossus is clearly running out of firepower to meet such payout projections.

The company remains on an extensive restructuring programme to hive off non-core assets and cut costs, and just yesterday cut its capital expenditure targets yet again. BP now expects to spend $16bn this year, down from an original projection of $17bn-$19bn. And capex is expected to clock in at $15bn-$17bn in 2017.

Such measures underline BP’s desperate need to conserve cash as fears over the oil market’s chronic supply imbalance persist. Indeed, with OPEC and Russian production rattling along at record levels, and US drillers plugging their hardware back into the earth with increasing gusto, a much-needed revenues — and subsequent earnings — turnaround may be some way off.

I believe the risks far outweigh the potential rewards at BP.

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

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 »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

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

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

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

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »