Today I am looking at three big dividend payers I believe are set to disappoint.
Rio Tinto
I am convinced the prospect of fresh commodity price weakness should send investors fleeing from diversified digger Rio Tinto (LSE: RIO). The business has a great history of building dividends year after year even in spite of previous earnings problems, and the City’s number crunchers remain convinced this trend should continue for some time yet.
Indeed, Rio Tinto is widely anticipated to raise last year’s reward of 215 US cents per share to 226 cents in 2015, and again to 233 cents in the following period. Consequently the miner boasts chunky yields of 5.9% and 6% for these years.
Still, I believe savvy stock pickers should give these readings short shrift. Predictions of further earnings dips through to end-2016 at least leave forecast dividends covered just 1.2 times and 1 times, well below the safety benchmark of 2 times. Asset divestments can only go so far to bolster the balance sheet and mitigate the effect of falling revenues, and with Rio Tinto also carrying a huge $13.7bn net debt pile — up 10% from the close of 2014 — I reckon dividends could be in for a hefty trim.
Centrica
Like Rio Tinto, I believe the prospect of further top-line pressure is likely to play further havoc with Centrica’s (LSE: CNA) dividend outlook. The power play has already been forced to swallow a hefty dividend downgrade in recent times, cutting 2014’s full-year payment to 13.5p per share from 17p in the previous period, and the abacus bashers are convinced that further pain is on the horizon.
A total dividend of 12p per share is currently projected for 2015 thanks to further earnings woes, although this figure still yields a market-beating 5.1%. And long-term investors may be drawn in by a 12.4p package for next year, creating a chunky and 5.2% and supported by a modest bottom-line bump, suggesting the worst could soon be over for Centrica.
I am not so bullish, however, as the threat of draconian regulatory action from Ofcom still looms large, a potentially-disastrous situation for Centrica’s future profitability and consequently dividend outlook. Meanwhile the rate of supplier switching continues to accelerate, causing Centrica’s subscriber base to gradually erode. And with the business nursing a £4.9bn debt mountain, and estimated dividends covered around 1.5 times through to the end of next year, I believe dividend hunters could end up severely disappointed.
Royal Dutch Shell
Thanks to the prospect of a prolonged supply imbalance across the oil market, I reckon dividends over at Shell (LSE: RDSA) (LSE: RDSB) are also in peril of falling disastrously short. The fossil fuel giant has been busy taking the hatchet to capital expenditure and group headcount for some time now, and the firm’s decision withdraw from the Arctic last month at least boosts its capital reserves a little further.
The City is not blind to the prospect of lasting revenues pressure on Shell’s dividend outlook, and expect dividends this year and next to slow considerably from previous periods. However, a predicted reward of 190 US cents per share for 2015, and estimated 191-cent dividend for next year, still yield an impressive 6.7%.
But I for one will not be suckered in by these gigantic figures. Firstly, dividend coverage falls well below the safety threshold through to the end of 2016, at 1.1 times, while Shell’s net debt pile also clocks in at many, many billions of dollars. And with crude oil inventories remaining at bursting point, and producers the world over continuing to pump wildly despite subdued demand data, in my opinion Shell’s dividend is likely to come a cropper sooner or later.
