Today I am weighing up the risks and the rewards over at three FTSE-listed heavyweights.
Metals and energy colossus BHP Billiton (LSE: BLT) has long been a haven for those seeking market-crushing dividends. The business has kept the full-year dividend chugging relentlessly higher even in spite of recent earnings weakness, but I believe the chronic imbalances across key markets means BHP Billiton is finally facing an inflection point.
Chinese trade data released overnight showed imports of iron ore and oil imports slip 14% and 13% respectively in August, while copper purchases remained flat from July’s levels. This is despite prices of all three commodities hitting multi-year lows, scenarios which has seen Beijing load up in previous years. If the world’s commodity monster is failing to pick up the slack caused by chronic oversupply, the earnings picture over at BHP Billiton and its mining peers looks perilous at best.
BHP Billiton is expected to fork out a dividend of 124 US cents per share in the 12 months concluding 2016, matching the previous year’s reward but still yielding an impressive 7.6%. But with the estimated payment sweeping past projected earnings of 82 cents, and the diversified digger having a huge $24.4 net debt pile to contend with, I reckon income chasers could end up disappointed.
I have long been an admirer of financial services play Ashmore (LSE: ASHM) thanks to its heavy emerging markets exposure. But as August’s stock market woes have highlighted, investor confidence in China and the wider South-East region remains patchy at best, and as a consequence earnings — and therefore dividends at the business — could come under pressure.
Ashmore announced yesterday that assets under management slumped by more than a fifth during the 12 months to June 2015, to $58.9bn, adding that “the past year has been challenging, with continued volatility in global markets.” And with fears over a Chinese ‘hard landing’ and the timing of Fed rate hikes likely to run for some time yet, I believe activity at Ashmore could continue to struggle in the near-term.
Don’t get me wrong: I am a firm believer in the opportunities afforded by Ashmore’s emphasis on developing regions. But with earnings expected to punch a double-digit drop in fiscal 2016 — leaving a predicted dividend of 17.2p per share covered just 1.1 times — I believe shareholder rewards could come under pressure in the more immediate term. Consequently a yield of 7% is certainly not a given.
Like BHP Billiton, fossil fuel giant BP (LSE: BP) remains at the mercy of chronic oversupply in the oil market. Crude prices have dipped back below $50 per barrel in recent days, and I reckon a dip to fresh multi-year lows is an inevitability as suppliers fail to adequately address the issue of excess pumping, and fresh waves of poor data from China hit the airwaves.
BP has undertaken a variety of cash-saving measures to ride out the storm, and in July took the axe to its capex targets once again — it now plans to spend $20bn in 2015 versus $22.9bn last year. But the steady stream of divestments, cost-cutting and expenditure reductions have failed to assuage fears over BP’s capital strength — indeed, Bank of America said last week that a likely crude price of around $60 per barrel through to 2018 will smash the company’s free cash flow.
The City currently expects BP to produce a dividend of 40 US cents per share in both 2015 and 2016, yielding a mighty 7.8%. But I believe the risks facing the payment in the short-term and beyond far outweighs the potential reward, as a backcloth of sinking crude prices offsets the effect of chronic belt-tightening and divestments on BP’s balance sheet.