Are 5% Dividend Yields Safe At Paypoint plc, Weir Group PLC And Vodafone Group plc?

Roland Head takes a closer look at the generous yields on offer from Paypoint plc (LON:PAY), Weir Group PLC (LON:WEIR) and Vodafone Group plc (LON:VOD).

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PayPoint (LSE: PAY), Weir Group (LSE: WEIR) and Vodafone Group (LSE: VOD) all offer a forecast dividend yield of more than 5%. But each company faces challenges.

Are these payouts sustainable?

PayPoint

Shares in payment processor PayPoint fell 3% this morning, after the group issued a mixed trading update. PayPoint, which operates bill payment terminals in convenience stores and corner shops in the UK and Romania, said that underlying revenue rose by 1.8% to £35m.

However, warm weather before Christmas meant fewer energy bill payments than usual. The group’s Collect+ joint venture with Yodel is also running at a small loss — a problem PayPoint is urgently trying to address.

Despite these headwinds, my view is that the PayPoint story remains attractive. Capital expenditure requirements are fairly low and cash generation has been consistently strong. The group’s operating margin has averaged 20% over the last five years, during which the dividend has risen by 65%.

A dividend hike of 10% to 42.6p per share is expected for 2015/16, giving a forecast yield of 5.1%. I believe this payout is likely to remain safe. PayPoint may be worth considering as an income buy.

Vodafone Group

Vodafone is a very popular income stock. I hold some myself. But the firm’s 5.1% forecast yield costs 11p per share to deliver. That’s around £2.9bn per year — more than twice forecast earnings per share of 4.8p for the year ending 31 March.

Although earnings are expected to rise to 5.8p next year, that still won’t be enough to cover the dividend.

After selling its stake in Verizon Wireless, Vodafone’s board committed to maintaining the dividend at 11p while investing in the business to generate future growth. Recent results suggest that sales and profits are starting to rise.

However, while Vodafone’s debt levels are much lower than most of its peers, I do wonder whether the group’s profits will recover fast enough to justify the decision to hold the dividend. I’m confident that the payout is safe this year and probably in 2016/17, but beyond that I’m unsure.

Weir Group

Engineering group Weir is heavily exposed to the mining and oil and gas sectors, which used to buy lots of Weir’s specialist pumps and other equipment. Unsurprisingly, sales have fallen off a cliff. Current forecasts suggest that revenue fell by 20% in 2015 compared to 2014.

Adjusted earnings per share are expected to fall by around 38% to 80p for last year. However, prompt cost-cutting and a strong balance sheet have helped Weir stay out of financial trouble. The firm is expected to pay an unchanged dividend of 44p per share for 2015. At the current share price of about 870p, this implies a yield of 5%.

Can Weir maintain this payout? The firm’s results from last year suggest that the dividend should be well covered by both earnings and free cash flow. By maintaining a fairly conservative dividend cover ratio of 3.5 to 4 when times were good, Weir’s dividend has remained affordable in more difficult market conditions.

However, I’m not sure if we’ve seen the bottom yet for Weir. It’s hard to predict when demand will start to recover in the commodity sector.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Roland Head owns shares of Vodafone Group. The Motley Fool UK owns shares of PayPoint. The Motley Fool UK has recommended Weir. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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