With the global economy enduring a very uncertain period, it would not be a major surprise for companies to cut their dividends. After all, the financial outlook for a company is more important than the finances of its investors and, in order to shore up the outlook for a business, it may be prudent to at least reduce shareholder payouts in the short run.
One company which did just that is Santander (LSE: BNC). As part of a strategic review last year it conducted a placing and also reduced its dividends from 44p per share to around 14p per share. Clearly, that is a huge fall and, perhaps unsurprisingly, Santander’s share price has gradually fallen from over 600p to its current level of just over 350p. While not all of this is due to a lower dividend, it is clear that a sizeable portion of its investors were somewhat disgruntled by the decline in their income.
However, Santander’s reason for slashing dividends makes sense. It wants to maintain its global exposure and also shore up its balance sheet in the face of a challenging Eurozone economic outlook. And, while further cuts to its dividend cannot be ruled out, they are now covered 2.6 times by profit, which makes them appear to be highly sustainable for the long run.
Meanwhile, United Utilities (LSE: UU) has been one of the most reliable income plays in recent years, with its dividends increasing in each of the last five years. However, with the liberalisation of the water services market due to take place in 2017, costly incidents such as the recent bacterial issue in Lancashire and pressure to cut water prices in real terms over the next few years, the company’s dividends could come under pressure.
In addition, with inflation being near-zero, there is arguably less demand for a significant rise in dividends. So, it could be the case that United Utilities matches inflation in the medium term while it is low and thereby still offers an enticing dividend growth outlook. And, with the company’s shares currently yielding 4.2%, they remain a very appealing income selection.
However, BHP Billiton (LSE: BLT) seems destined to slash dividends. The mining sector is experiencing a hugely difficult period, with further commodity price falls in the coming months appearing to be increasingly likely. This poses a problem for BHP, since it means that its earnings are likely to come under pressure and makes an already high dividend even less affordable.
In fact, BHP currently pays out 176% of profit as a dividend. While this can be paid in the short run, it is unlikely that BHP will be able to afford such a high level of shareholder payout in the medium to long term, since capital will be required to reinvest in the business for future growth. So, unless the outlook for commodities improves significantly, a cut in dividends is on the cards for BHP. Still, the market appears to already be pricing this in, since it yields a whopping 8.1% at the present time.
