Today I am looking at three stocks that could be set to disappoint dividend hunters.
Tesco
Battered supermarket giant Tesco (LSE: TSCO) already sounded the alarm back in August when it vowed to cut the interim dividend by a whopping 75%, to 1.16p per share. The company warned that “challenging trading conditions and ongoing investment” had weighed on its financial strength, and with these issues continuing the City expects dividends to take a hammering in the coming years.
Indeed, this former-dividend favourite is anticipated to shell out a meagre full-year payment of 1.24p for the year concluding February 2015 — down from 14.76p in each of the past three years — as earnings slip a colossal 68%. And payments are expected to loiter around this level during the current 12-month period, resulting in a paltry 0.5% yield through to the early part of next year.
However, analysts reckon that Tesco’s bottom-line bounceback is set to kick in from this year, with a 4% uptick due to be followed with a 29% bounce in fiscal 2017. Consequently the supermarket is expected to drive the dividend higher again next year, to 4p, a figure which produces a much-improved yield of 1.6%.
I am not so optimistic, however, even though sales at the firm have picked up more recently. Not only is Tesco’s expensive discounting strategy a huge pull on the grocer’s earnings performance, but the investment needed in online and convenience is also set to stretch the firm’s capital position. Consequently I believe that the company remains a risky opportunity for dividend chasers.
Centrica
Like Tesco, energy giant Centrica (LSE: CNA) has been battered by the effect of intensifying competition across its British Gas retail operations, not to mention regulatory pressures forcing it to slash tariffs. With declining crude prices also affecting its upstream divisions, earnings are expected to dip 5% this year.
Subsequently Centrica is anticipated to reduce the 2015 full-year dividend to 12.5p per share, down from 13.5p in 2014 and a second annual reduction if realised. However, a 2% bottom line improvement in 2016 is expected to herald a slight payment uptick, to 12.7p. As a result the power play sports a yield of 4.8% through to the close of next year.
Still, I believe that Centrica’s desire to keep a strong balance sheet and robust credit ratings could cause the business to deliver payments much lower than currently anticipated. With net debt standing at a vast £5.2bn as of the close of last year, and revenues set to remain under pressure, it is easy to envisage that dividends will keep on falling through the floor.
Dragon Oil
Fossil fuel explorer Dragon Oil (LSE: DGO) wowed the market back in August when it elected to supercharge the interim dividend by an eye-popping 33%, to 20 US cents per share. But continued weakness in the crude price since then — Brent was trading around $105 per barrel back then versus $58 currently — has since weighed on the firm’s progressive policy, and a final payout of 16 cents last year was actually down 11% from 2013 levels.
Indeed, the intensifying stress on Dragon Oil’s balance sheet was exemplified by the company’s decision to bang its attempted acquisition of Petroceltic International on the head at the tail end of last year. With earnings expected to slump 54% this year, the City expects Dragon Oil to reduce the dividend to around 32.4 cents from 36 cents in 2014.
It is true that this payout still produces a chunky 3.7% yield, and the City expects a 45% earnings rebound next year to lift the dividend to 34.9 cents, pushing the yield to an even-better 4%. But with a struggling global economy failing to suck up excess global oil supply, and output across the world continuing to stomp higher, I believe that such projections could fall by the wayside as black gold prices look set to toil.
