Today I am looking at the dividend prospects of two battered FTSE 100 giants.
Dig elsewhere
Diversified mining colossus Rio Tinto (LSE: RIO) has already fired a warning shot for those seeking chunky dividends in 2016 and beyond.
The London-based business announced in February that the commodities sector’s murky outlook will put paid to the steady payout increases of previous years. Indeed, Rio Tinto noted that “maintaining the current progressive dividend policy would constrain the business and act against shareholders’ long-term interests“.
Rio Tinto said that it expects to pay a dividend of at least 110 US cents per share in 2016 as a result, down markedly from the 215-cent reward of last year. In line with this statement, City brokers expect the mining giant to fork out a dividend of 127 cents this year, a figure that yields a splendid 4.6%. However, I believe that these forecasts are built on shaky ground.
First of all, Rio Tinto is expected to nurse a third successive earnings dip in this year, a 49% reduction resulting in earnings of 127 cents per share is forecast, matching the predicted payout. Obviously this leaves little margin for error should commodity prices fail to recover — indeed, copper and oil values have resumed their downtrend in recent days as supply/demand fears have reared their head again.
And Rio Tinto cannot rely on a robust balance sheet to relieve its murky earnings outlook, either. The company saw net debt rise to $13.8bn as of December, up 10% from the same point in 2014.
With Chinese metal imports likely to keep falling amid painful economic rebalancing, and producers of key commodities continuing to swamp the market with unwanted material, I reckon dividends at Rio Tinto could keep on falling well beyond this year.
Don’t get burned
Like Rio Tinto, energy giant Centrica (LSE: PLC) also remains at the mercy of worsening commodity markets — the firm’s Centrica Energy arm saw operating profit slump by almost two-thirds in 2015 as revenues lagged. And the company is also being put on the back foot by the rise of cheaper, independent suppliers across its retail operations.
Centrica was forced to slash tariffs at its British Gas division twice in 2015 in order to maintain market share, and was forced to cut gas prices again — this time by 5.1% — in February. And the company should be braced to make further reductions as UK consumers become increasingly receptive to switching suppliers.
These pressures have already forced Centrica to reduce the dividend in each of the last two years in line with falling earnings. But although a further reduction is anticipated in 2016 — this time by a hefty 12% — the City expects Centrica to lift the dividend to 12.2p per share from 12p last year.
Still, investors should not be drawn in by the monster 5.6% yield, in my opinion. Not only is the predicted payment covered just 1.2 times by prospective earnings, but news that Moody’s is considering downgrading Centrica’s credit rating underlines the firm’s poor financial health.
Until revenues pressures begin to ease, I believe that dividends could continue to recede at Centrica in the near-term and beyond.
