Are These Dividends At Risk? Premier Farnell plc, Glencore PLC, Fresnillo Plc, Persimmon plc And Pearson plc

Figures suggest Premier Farnell plc (LON: PFL), Glencore PLC (LON: GLEN), Fresnillo Plc (LON: FRES) ,Persimmon plc (LON: PSN) and Pearson plc’s (LON: PSON) dividends are at risk.

| 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.

sdf

Rushing out to buy the stocks with the highest dividend yields available is a risky game. Indeed, chasing yield can end up costing you more than you stand to make, although most of the time it’s almost impossible to tell which companies are most likely to cut their dividends. 

To try and help investors from cashing unsustainable dividend yield, investment bank Société Générale publishes a monthly list of “high dividend risk companies” across developed markets.

Firms that make it onto the list have a dividend yield of 4% or more and a lower-than-average Merton score — a measure of credit risk and financial stability. This month Premier Farnell (LSE: PFL) and Glencore (LSE: GLEN) top the list, while Fresnillo (LSE: FRES) tops the bank’s list of the most overvalued UK companies. 

Dividend jeopardy 

Premier Farnell supports a dividend yield of around 8% at present and trades at a forward P/E of 9.5. Traditionally, Premier has paid out the majority of its profits to shareholders. The company’s dividend cover ratio has averaged 1.2 for the past five years. Nevertheless, Premier’s earnings have collapsed by around 40% since 2012 and management issued another profit warning during June. As Premier restructures to improve profitability, management could be forced to axe the dividend to save cash. 

Glencore is under severe pressure to slash its dividend payout and key the cash for debt repayments. City analysts are becoming extremely concerned about the company’s $50bn debt pile. If commodity prices don’t recover soon, Glencore could find itself being forced to sell off assets to repay creditors. Even though Glencore’s dividend yield of 9% may be the best in the FTSE 100, it should be avoided — it might not be around for long!

Société Générale believes that Fresnillo should be avoided as it is one of the most overvalued companies trading on the London market. The company currently trades at a forward P/E of 55, making it one of the most expensive companies in the metals and mining sector. What’s more, Fresnillo also looks expensive on price to sales, price to book and EV to EBITDA ratios. 

Dividend champions 

Investors should avoid Premier, Glencore and Fresnillo. But Société Générale believes that Persimmon (LSE: PSN) and Pearson (LSE: PSON) are two of London’s best income stocks. Using a similar method to the high dividend risk screen mentioned above, Société Générale’s models show that Pearson and Persimmon’s dividend yields are well covered by earnings and the two companies have solid balance sheets, which can withstand sudden shocks.

According to City forecasts, Persimmon’s shares will support a yield of 5.3% next year, and the payout will be covered 1.5 times by earnings per share. Pearson currently supports a yield of 4.9%. 

Moreover, both companies have cash-rich balance sheets with low levels of gearing. Pearson’s net gearing is 42%, and Persimmon has a net cash balance of £272m.


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.

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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

High flying easyJet women bring daughters to work to inspire next generation of women in STEM
Investing Articles

In 12 months, a £10,000 investment in easyJet shares could become…

easyJet shares have plunged in value following a profit warning on Thursday (17 July). Can the FTSE 100 travel share…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

This S&P 500 blue chip looks far too cheap to me at $183!

Our writer picks out one high-quality S&P 500 stock that is currently the cheapest among the 'Magnificent 7' group of…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

Down 23% today! This one’s stinking out my Stocks and Shares ISA

Our writer's wondering what to do with a problem named Ashtead Technology (LON:AT.) in his Stocks and Shares ISA portfolio.

Read more »

Two male friends are out in Tynemouth, North East UK. They are walking on a sidewalk and pushing their baby sons in strollers. They are wearing warm clothing.
Investing Articles

Down over 20%, should I dump this FTSE 100 dividend stock?

Our writer has been loving the passive income this dividend stock has been throwing off. But does the big share…

Read more »

Businesswoman calculating finances in an office
Investing Articles

I’ve just bought this FTSE share…

Our writer explains the thought process that led to him buying this FTSE share. One that’s likely to do well…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Just over £5 now, easyJet’s share price looks cheap to me anywhere under £13.84

easyJet’s share price has dropped recently, which could mean the business is worth less than before. Conversely, it could mean…

Read more »

Trader on video call from his home office
Investing Articles

36% under ‘fair value’ and forecast annual earnings growth of 6%, should investors consider this FTSE 250 stock?  

This FTSE 250 firm is a leader in a growing sector and has secured several new sites to drive its…

Read more »

Portrait of a boy with the map of the world painted on his face.
Investing Articles

3 UK shares that have recently become takeover targets

Mark Hartley examines why these three UK shares have become takeover targets and could be bought out by rivals in…

Read more »