Today I am looking at three stocks which could experience extreme dividend turbulence.
Diversified mining giant Anglo American (LSE: AAL), like the rest of the mining sector, remains on a path of extensive cost-cutting, project divestments and capex reductions in a bid to counter slumping revenues from lower commodity prices.
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Not surprisingly, however, these measures are failing to prevent the bottom line from collapsing through the floor — indeed, Anglo American saw underlying revenues shuttle 25% lower last year as worsening supply/demand balances weighed.
Even though the City expects Anglo American to record a fourth consecutive earnings decline in 2015 — a 19% drop is currently slated — the full-year dividend is expected to rise from 85 US cents per share stretching back to 2012, to 87 cents. And predictions of a 42% earnings leap in 2016 underpins estimates for a further payout hike, to 88 cents. These numbers create a chunky yield of 4.6% through to the close of next year.
However, I believe that the possibility of worsening prices across critical commodity markets — particularly the iron ore and coal sectors — could smash these projections. Dividend coverage for this year runs at just 1.6 times expected earnings, for example, well below the security benchmark of 2 times. And Anglo American’s shareholders certainly cannot rely on a strong balance sheet to facilitate these forecasted payments, either; net debt crept to $12.9bn by the close of 2014 from $10.7bn in 2013.
The woes facing grocery giant Sainsbury’s (LSE: SBRY) was again laid bare this month by Kantar Worldpanel, who revealed that revenues slipped a further 1% in the 12 weeks to February 1 as the popularity of Britain’s discount and premium chains continued to surge. Despite increasing its operations in the online and convenience store growth sectors, Sainsbury’s is fighting a losing battle to stop the rot as footfall at its superstores plummets.
The number crunchers expect this pressure to drive earnings lower for the first time in many moons during the year concluding March 2015, and a 22% decline is currently pencilled in. And things are not expected to improve anytime soon, reflected by forecasts of an extra 14% slip in fiscal 2016.
Sainsbury’s has already warned that for 2015, “our dividend for the full year is likely to be lower than last year given our expected profitability.” Consequently analysts expect the business to chop the payout from 17.3p per share in 2014 to 12.7p this year, and again to 11p in 2016.
It is true that these projections still create meaty yields of 4.7% and 4% correspondingly. But investors should be aware that Sainsbury’s could replicate the drastic measures made by Tesco last summer — Britain’s number one chain slashed the interim payment by 75%, and with Sainsbury’s facing the same competitive pressures as well as an eroding balance sheet, dividend cuts could end up to be much more severe than those currently forecasted.
Everyone was expecting Sky’s (LSE: SKY) bid in the latest Premier League broadcasting rights auction this month to represent a vast premium from what it paid three years ago. But the Brentford firm’s decision to shell out £1.4bn per season for three years from 2016 took the market aback, the cost leaping a colossal 83% from the prior period.
The move was a necessity to stop BT Group from gutting the Sky’s sports portfolio, its rival having already secured UEFA Champions League football from next year until 2018. However, the auction underlines the vast amounts Sky is having to shell out to stop its competitors running away in the ‘quad-play’ market.
Virgin Media announced this month that it plans to follow BT’s lead and expand its own broadband network across the country, while the latter has also re-entered the mobile phone space by purchasing EE for £12.5bn. Sky has also made overtures into the mobile sector and has agreed a deal to use Telefonica’s masts to launch its own network next year.
One can therefore expect Sky’s capital pile to experience rising stress as the arms race hots up — the acquisition of Sky Italia and Sky Deutschland has already hiked the firm’s net debt pile to £6.3bn, it announced this month, up from £1.4bn in February 2014.
Despite these concerns, the abacus bashers expect Sky to lift last year’s 32.2p per share payout to 32.6p in the 12 months concluding June 2015, and again to 35.4p in fiscal 2016, producing yields of 3.4% and 3.7% correspondingly. But with dividend coverage running at just 1.6 times and 1.8 for these years, I believe that the prospect of further payout hikes could be put to the sword should competitive pressures batter the bottom line.