Today I am looking at the investment cases of four London-listed income plays.
Anglo American
Regardless of the jumbo dividends currently forecast by the City, I believe investors should continue to give diversified miner Anglo American (LSE: AAL) short shrift. It is far too early to call a bottom to the commodity sector’s frightening descent, as economic data from China continues to disappoint and resources production continues to head skywards due to a lack of consensus across the mining community.
Anglo American is expected to address this poor market outlook by cutting 2014’s 85 US cents per share dividend to 68 cents next year, and again to 61 cents in 2016. Still, many investors will be drawn by the colossal yields of 8.1% and 7.3% respectively.
But with Anglo American expected to experience further double-digit earnings drops this year and next — creating extremely poor dividend coverage of around 1.2 times — and the business nursing a massive $13.5bn net debt pile, I reckon current payout projections could wildly miss these estimates.
Vedanta Resources
Naturally the same logic can be applied to metals and energy play Vedanta Resources (LSE: VED), which is also buckling under a hulking $7.5bn net debt mountain as well as collapsing commodity values. The company announced just this week that a 12% revenues decline during April-September caused EBITDA to slump 39%, to $1.3bn. As a consequence Vedanta decided against forking out an interim dividend.
Despite these problems the City remains convinced that Vedanta should keep on providing market-smashing dividends, even if an anticipated reward of 64 US cents per share for the year to March 2016 is expected to fall to 62 cents in 2017. Such projections produce massive yields of 8.5% and 8.1% correspondingly, but — like Anglo American — I cannot see how the business can afford to shell out such plump rewards in the current climate.
Redefine International
I am far more optimistic concerning the earnings — and consequently the dividend — prospects of real estate investment trust (REIT) Redefine International (LSE: RDI). The business reported last week that earnings available for distribution increased 13.6% in the 12 months to August 2015, to £44.4m, while cash advanced to £95.9m from £91.3m previously.
As well as benefitting from a bubbly British retail landscape, I believe Redefine International’s decision to hive off underperforming assets and boost its exposure to eurozone heavyweight Germany should also deliver rich returns. As the bottom line looks set to canter higher from here on in, Redefine International is expected to raise last year’s dividend of 3.25p per share to 3.36p in 2016, creating a delicious yield of 6.1%.
Admiral Group
With the car insurance market becoming ever-more favourable, I fully expect dividend flows at Admiral (LSE: ADM) to motor higher in the coming years. Indeed, market competitor Direct Line announced this week that car premiums leapt 8.4% during July-September, speeding up from the 5.9% rise in the previous three months and doubling the 4.2% growth rate punched during the first quarter.
And Admiral — which also operates the Diamond and Elephant banners — carries considerable clout when it comes to maintaining its customer base. Meanwhile, the company’s operations in Europe and the US are also improving rapidly and appear on course to deliver terrific long-term gains. For 2015 a reward of 96.8p per share is forecast, creating a bumper yield of 6%. And the yield is maintained at this level for 2016 thanks to expectations of a 97.2p dividend.
