The last dividend Tesco (LSE: TSCO) shareholders received was back in December of 2014. But with signs that the business is turning a corner, could dividends be back soon? Annual reports released in April showed the grocer boosted sales for the first time in three years by 0.1%. Even more importantly, operating margins in the UK rose to 1.17%. While this is a far cry from the 5%-plus posted before the accounting scandal hit, margin growth of 81 basis points in the past six months should be cheered.
Also positive was a £6.2bn reduction in debt to £15.5bn. However, there are still problems beneath these outwardly good results. Before exceptional items, earnings per share, a critical metric for judging dividend viability, fell from 4.14p to 3.41p. The dramatic reduction in total debt was also due mostly to the sale of Korean operations, and Tesco is running out of big assets it can dispose of to lower debt.
CEO Dave Lewis also cautioned analysts that high earnings growth shouldn’t be expected in the short term. While this could simply be Lewis attempting to set a lower bar for Tesco to jump, it worries me. At the end of the day, increased competition and price wars that obliterated profits across the industry remain in play and will likely constrain dividend growth for the foreseeable future once shareholder payouts return.
No quick return to high dividends
Plummeting commodity prices and high debt forced miner Anglo American (LSE: AAL) to slash its dividend by more than 60% last year. And, with the company still haemorrhaging cash, it’s been suspended for 2016 as well. Shareholders who bought Anglo for income may not love this, but it’s undoubtedly a wise move by management. The company had $12.9bn of debt at year-end and a worryingly high gearing ratio of 37.7%.
Aside from slashing the dividend, it’s moving forward with a slew of divestments to focus on its core, low-cost-of-production assets in diamonds, platinum and copper. But with the medium-term outlook for platinum and copper poor as Chinese demand slows, analysts are expecting earnings to drop a further 34% this year. With high debt, significant assets still to dispose of and low prices for major commodities, I don’t believe dividends will be back to their previous 85¢ level anytime soon.
Dent in debt mountain?
Tullow Oil (LSE: TLW) is sadly familiar with the effects of plunging commodity prices and high debt on dividends. The African oil producer was forced to suspend its dividend last year after its gearing ratio hit 56%. This is a major worry for such a small producer, but Tullow does have several factors on its side when it comes to resuming dividend payments.
The main one is the new Ghanaian TEN Field, which is scheduled to begin producing first oil this summer. When production hits peak capacity next year, it could add 35k barrels of daily production. In addition to providing significant low-cost-of-production oil, capital spending will also fall dramatically once the project is completed in 2017. These low-cost assets are also a huge benefit to Tullow as cash operating costs per barrel are far lower than most independent producers at $15. While Tullow wasn’t a huge income play, as management preferred to invest retained earnings in business growth, dividends should resume if oil prices continue to their rally and Tullow is able to make a dent in its mountain of debt.
