Some of Britain's largest companies have been so badly hammered that we'd be mad not to sit up and take notice of their very attractive dividend yields.
After a look yesterday at dividend yields, I've been doing a trawl of some companies with high yields, and on that score I really do think there are some anomalously priced bargains out there. To start with, here's one that several of my fellow TMF writers have waxed favourable about in recent months…
Big Oil
The company is oil and gas giant BP (LSE: BP). Back in January, Bruce Jackson suggested that it might be a big company worth taking a punt on, and shortly afterwards, in February, he pointed out that its dividend yield had risen above 8.2%. At the time of its first quarter results announcement, Malcolm Wheatley told us that, despite falling profits (which were pretty much inevitable after the elevated oil price subsided and the recession started to bite), BP was maintaining its dividend policy.
Looking at BP today, results for the year ending December 2009 are expected to be way down on 2008, with earnings per share falling nearly 50%. But even the expected 42p per share for 2009 still puts it on an attractive prospective P/E of 11, with the 2010 estimate of 59p suggesting a P/E of 8 (based on today's price varying around the 475p mark).
And despite this year's fall in earnings, BP plans to maintain its dividend at 38p per share this year (and none of the many analysts following the company has seen fit to challenge that). That makes for a dividend yield of 8.8%, which is way better than any savings account you're going to find.
Of course, oil and gas is a cyclical sector at the heart of the economy, and a long and deep recession is going to hit it hard. And while some rosy-eyed optimists might think the recession is drawing to an end and the stock market is bouncing back to health, I agree with those who think that's unlikely.
But I do think all of the rational pessimism, and then some, is already in the BP share price, and that a dip in the dividend is unlikely in the next two years. And I still think there's a long-term bargain to be had there.
And phones too
Another badly hammered company these days is good old BT Group (LSE: BT-A). Having slashed its dividend by more than half this year, BT has seen its share price tumble to today's level of around £1 (from twice that a year ago). 2009 was a dreadful year, with normalised earnings per share plummeting from last year's 22p to just 3p. Fears surrounding the size of BT's pension fund deficit have been worrying investors all year too, with the deficit looking especially bad when share prices were insanely depressed so very recently.
But even next year's reduced earnings expectation still puts the shares on a prospective P/E for 2010 of just under 8, and a dividend yield of 6.7%. After having bitten the bullet so hard this year, I really do think that dividend will be maintained next year. In fact, in two or three years time I expect to see fears over the pension deficit having subsided, BT's cost-cutting measures having had some serious effect, and earnings modestly growing again. Many may think I'm mad, but I reckon today could turn out to be a good time to buy BT shares.
And finally, some caution…
In case anyone thinks I'm a bit too hung up on dividend yield, I want to close with a quick cautionary tale that highlights the risks involved. During my trawl of high yield companies, I came across Clinton Cards (LSE: CC), which has seen varying popularity with small investors over the years. It has clearly been a successful company in its market niche over the years (though with the world becoming increasingly connected online, I can see greetings cards one day joining LP records and, sadly, Kodachrome, in becoming quaint reminders of the way we used to do things). A quick glance at last year's dividend shows a yield, based on the current price, of nearly 9%, which looks very nice indeed. But…
This year (ending August) is expected to see a big drop in earnings, with EPS down 80% on last year's 7.7p. Nobody is forecasting the year's dividend yet, but if it isn't cut substantially from last year's 2p per share with the yield ending up a lot lower than 9%, I'll eat my birthday cards this year.
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