All too often, dividend cuts seem to catch investors by surprise. Yet very often, the warning signs are obvious.
In this article, I’ll take a look at three FTSE 100 stocks — Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US), Wm Morrison Supermarkets (LSE: MRW) and BG Group (LSE: BG) — where I believe dividend expectations could soon fall sharply.
Lloyds
Lloyds has been hoping to restart dividend payments for some time. The latest City forecasts suggest that the bank will declare a dividend of 1.1p in its 2014 results, which are due on 27 February.
This gives the shares a prospective yield of 1.5%, rising to 3.6% for 2015.
However, I believe there is a real risk Lloyds won’t pay a dividend for 2014. The firm’s last update — in October — indicated that it was still in discussions with the Prudential Regulation Authority (PRA) about resuming dividend payments.
Although Lloyds did pass the PRA stress tests in December, there is a political factor involved here, too: the taxpayer still owns 25% of Lloyds.
Will the government really allow Lloyds to restart dividend payments before May’s general election, when taxpayers are still out of pocket from the Lloyds bailout? I’m not convinced.
Morrison
Rather surprisingly, Morrison maintained its generous dividend last year, earning shareholders a 13p payout, which gives the shares a trailing yield of 7.0%.
Outgoing chief executive Dalton Philips promised more of the same this year, but he won’t be in charge — he left on 16 February. The firm has an interim CEO at the moment, but I reckon that a dividend cut will be an obvious choice when a new chief takes charge, later this year.
City analysts seem to agree: the latest consensus forecasts are pricing in a 25% dividend cut, taking the payout down to 9.5p. However, I think a 50% cut would make more sense — Morrison’s shares would still yield 3.5%, and the cut would save £152m of cash, which could be used to reduce debt.
BG Group
BG Group’s new boss, Helge Lund, started work on 9 February.
Mr Lund’s appointment came too late for him to cut last year’s dividend payout, but with BG’s capital expenditure expected to peak this year, significantly exceeding cash flow once again, I believe a cut could make sense.
BG’s dividend cost the firm around $1bn last year. Cutting this payout would have eliminated most of the $1.4bn increase in BG’s net debt.
