Today I’m looking at the dividend prospects of two London-quoted leviathans.
Commodity play under the cosh
With supply and demand indicators across the commodities sector continuing to worsen, I believe dividend projections for BHP Billiton (LSE: BLT) remain patchy at best.
Diversified resources rival Rio Tinto generated shockwaves this month by announcing the curtailment of its own payout policy. The digger claimed that “maintaining the current progressive dividend policy would constrain the business and act against shareholders’ long-term interests” given the murky state of commodity markets.
With Glencore, Anglo American and Vedanta Resources also reining-in their dividend policies in recent months, the City expects BHP Billiton to take the axe to its own progressive dividend policy sooner rather than later. Indeed, last year’s payout of 124 US cents per share is expected to dip to 110 cents in the 12 months to June 2016.
This projection still creates a gigantic 9.8% yield however, obliterating the FTSE 100 average of around 3.5%. But I believe shareholders could be shocked by an even-larger dividend cut than currently predicted.
Earnings are expected to register at just 77 cents per share in 2016, down almost two-thirds from 2015’s level and significantly lagging the currently-estimated dividend.
And the Standard and Poor’s decision to downgrade BHP Billiton’s credit rating this month hardly gives the resources giant much room for manoeuvre either. Net debt clocked in at a colossal $24.4bn as of last June, and further commodity price weakness since then is likely to have heaped further strain on the balance sheet.
With raw materials values set to continue lagging as China cools and global metal and energy production surges, it seems inevitable that BHP Billiton will be forced to bite the bullet sooner rather than later, in my opinion.
Powering down?
Like BHP Billiton, I believe electricity supplier SSE’s (LSE: SSE) worsening revenues outlook also bodes ill for dividend payments looking ahead.
Britain’s major suppliers are all being caught in a race to the bottom to protect their customer bases, with Centrica, E.On, EDF and SSE itself all taking the hatchet to gas prices in recent weeks.
But calls to introduce even bigger cuts in light of collapsing wholesale prices remain a thorn in the side, particularly as the threat of profit caps and other drastic action from Ofgem remains a very real threat.
SSE said last month that it “still expects to report an increase in the full-year dividend… that will at least be equal to RPI inflation.” But as the trading environment becomes more challenging I believe the power play may struggle to meet such a target further down the line.
For the period to March 2016, the City expects SSE to fork out a dividend of 90.2p per share, yielding an exceptional 6.8%. But while the firm is embarking on self-help measures like asset sales to bolster its capital strength, I reckon a backdrop of intensifying competition still makes the business a dicey long-term dividend pick.
