Today I am discussing the dividend picture over at Lloyds Banking Group (LSE: LLOY) and BT Group (LSE: BT-A).
Dividends in danger?
The success of Lloyds’ self-help scheme in the wake of the 2008/09 government bailout has proved nothing short of spectacular.
Under the stewardship of António Horta Osório, the bank has significantly repaired its balance sheet (the firm’s CET1 capital ratio clocked in at a formidable 13.8% after dividends as of December), eventually enabling the company to crank its payout policy back into gear in early 2015.
And with its Simplification streamlining strategy having plenty more left in the tank, Lloyds is anticipated to keep dividends moving higher during the medium term at least, raising the 2.55p per share reward of last year to 3.6p in 2017 and to 4.2p next year. This means that Lloyds carries eye-popping yields of 5.4% and 6.3% for this year and next.
But investors shouldn’t break out the bubbly just yet as there is plenty that could derail the payout policy in the near term and beyond.
The bank may well find itself hammered by an escalation in PPI claims ahead of the FCA’s 2019 claims deadline, offsetting the effect of huge cost-cutting elsewhere. And the business faces a double whammy of a significant revenues slowdown as the waves of Brexit crash against the domestic economy, particularly as it lacks any foreign exposure to offset these potential troubles.
Pull the plug
But arguably BT’s dividend forecasts are on even shakier ground than those of Lloyds.
Like the banking giant, BT is also expected to have endured some earnings pain more recently, a 17% bottom-line decline expected for the year to March 2017. But this is not expected to hurt the telecoms titan’s progressive dividend policy — rather, an anticipated 15.3p per share reward would represent an upgrade from 14p in the prior period.
And with BT expected to return to earnings growth this year, dividends are set to keep motoring and payments of 16.9p and 18.7p are predicted in this year and next. Consequently BT sports chunky yields of 5.4% for 2017 and 5.9% for 2018.
Scratch a little deeper however, and suddenly BT’s income prospects appear a little more fragile. Firstly dividend coverage stands at 1.7 times and 1.6 times for 2018 and 2019 respectively, below the broadly-considered safety threshold of two times.
And the firm’s January warning that “we face a more challenging outlook in the UK public sector and international corporate markets” should cast doubts on even those modest earnings rises, and with it predictions of plentiful dividends.
But difficult trading conditions are not the only reason for income hunters to wring their hands. Not only could BT face a bigger-than-expected black hole from the accounting scandal in Italy, but its faces extra strain from the ballooning pension deficit. This rose to £9.5bn as of September from £6.2bn just three months earlier.
And to put further pressure on the balance sheet, it was also fined £42m last month by Ofcom, and has been ordered to pay £300m to its rivals in compensation for delays in rolling out its high-speed ethernet lines.
With the pressure steadily mounting on BT’s financial health, I reckon the business — like Lloyds — is a risk too far for dividend investors.
