With interest rates set to stay low for the foreseeable future, the sky-high yields on many FTSE 100 stocks look even more dazzling than ever. So that’s at least one thing we can thank Bank of England governor Mark Carney for. Many top stocks now offer yields of 5%, 6% or even more — a glorious alternative to the dismal rates of interest you will get on cash these days.
The obvious problem is that you can’t always rely on these dividends. Here are three household name stocks with blockbusting yields, far higher than you would normally expect from these companies. But can you rely on them?
Black Gold
The Deepwater crisis put an end to BP (LSE: BP) as a go-to source of income. The dividend is back in force, however, with BP now yielding 6.30%. Like many an oil stock, this is down to the crashing oil price, which has knocked BP’s shares down 15% in the last six months alone. However, trading at 28 times earnings, it remains surprisingly expensive.
The oil price slump took everybody by surprise and the recovery could be just as swift and shocking. US shale rig count is falling away, finally. China and Europe are flooding their economies with stimuli that may revive growth and demand. Saudi could reverse its over-production policy at any moment. Yet oil is still falling — Brent crude is down 3.53% this morning to $48.35 a barrel.
The BP dividend looks safe in the short-term. But another year $50 oil — or worse, lower — and it will come under serious pressure.
Profit pipeline
Where did it all go wrong for pharmo giant GlaxoSmithKline (LSE: GSK)? It was possibly the UK’s favourite income stock, but turmoil was just around the corner in the shape of the Chinese bribery scandal and plunging profits. Chief executive Sir Andrew Witty has been struggling to turn things round, this week delivering an extensive report on Glaxo’s drugs pipeline for the first time in 12 years.
Whitty’s presentation appears to have fallen a bit flat — too many of the 20 drugs he highlighted are still in early-stage clinical trials, where the failure rate can be high. At 14.53 times earnings, I would have expected Glaxo to be a bit cheaper. Its yield of 5.80% is juicy but covered just 1.2 times. Management has pledged to pay out 80p a share for the next few years. Earnings per share for 2016 are forecast to rise 11% to 84.78p a share, so that may be doable, but it could be a close run thing.
Can You Be Sure?
I’ve recently felt that J Sainsbury (LSE: SBRY) has been unfairly punished by the wider crisis affecting the supermarket sector, as its profits have held up better than most. To a degree I feel vindicated, with the share price up 11% this year. Performance has held up in recent months, whereas Tesco’s ‘Drastic Dave’ recovery now looks more like a dead cat bounce.
Sainsbury’s looks nicely priced at 10.42 times earnings and yields a decent 4.82%. Latest figures from Kantar showed it increasing sales 1.1% to £3.96bn, thanks to a strong showing from online and local stores, while rivals Tesco, Asda and WM Morrison all continued their slide. If that looks promising, remember that Sainsbury’s has repeatedly trimmed its dividend lately, down from 17.13p in the year ending March 2015 to 13.66 in 2015. Next year, the forecast is 10.77p. You have been warned.
