Are these 5%+ yielders too risky right now?

Royston Wild looks at two dividend stocks standing on shaky foundations.

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Telecommunications play KCOM Group (LSE: KCOM) found itself on the back foot on Tuesday following the release of full-year numbers, the stock last 2% lower on the day.

Today’s modest decline, however, suggests that investors see nothing alarming in KCOM’s latest release, helping the stock remain comfortably off 2017’s troughs of 87.5p per share struck last month.

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KCOM announced today that revenues slumped 5.1% during the 12 months to March 2017, to £331.3m. This forced pre-tax profits at the firm to shrink 65.6% during the period, to £30.5m.

KCOM has attributed the bottom-line fall to the “continuing decline in legacy business and additional cost of the national fibre network outsource,” after the firm had sold off certain network assets last year.

A poor connection

Despite this adverse result, KCOM elected to raise the full-year dividend to 6p per share from 5.91p in the prior period.

The broadband and telephone giant has undergone vast restructuring in recent times, the business shuttering numerous brands to operate under one fascia concentrating on the Hull and East Yorkshire region. It is also taking steps to develop its Enterprise arm which provides IP-related communications and IT services to business.

Irrespective of these measures however, the City expects KCOM to continue to toil for some time yet. For fiscal 2018 a further 8% earnings decline has been projected, and an additional drop — of 3% — is pencilled-in for the following period.

Against this backcloth the City expects KCOM to annex its progressive dividend policy and keep the dividend locked at 6p this year. While this projection still yields a juicy 6.6%, I reckon investors should give such a figure short shrift.

Not only does this forecast payout outstrip predicted earnings of 5.4p per share, but KCOM is also battling a serious deterioration in the balance sheet. The telecoms giant swung from net funds of £7.4m in 2016 to net debt of £42.4m last year.

With KCOM also warning today that it expects “a further decline in revenues and margins associated with our legacy activities,” I reckon the business is far too risky for dividend chasers right now.

In a hole

Like KCOM, I believe FTSE 100 mining giant BHP Billiton (LSE: BLT) is another big yielder, which investors should steer clear of.

Having been forced to cut the dividend to 30 US cents per share in the last fiscal year, from 124 cents in the year to June 2015, BHP is expected to get onto the front foot again this year with an 81 cent reward. Such a figure yields a chunky 5.4%.

Supported by resurgent iron ore values more recently, City brokers expect earnings at BHP to explode 468% in the period to June 2017. Still, share pickers should bear in mind that this figure is still covered just 1.6 times by predicted earnings, some way below the safety yardstick of two times.

And looking further out, the threat created by swelling oversupply across many commodity markets, allied with patchy demand data from China, threatens to slam raw materials values back into reverse once again. This view is shared by many analysts, a point underlined by forecasts of a 2% bottom-line slide at BHP during fiscal 2018.

I believe the alarming fundamental signals from BHP’s major markets make it a risk too far right now.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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