Standard Chartered PLC’s Dividends Are Set To Fall

Standard CharteredThe Standard Chartered (LSE: STAN) (NASDAQOTH: SCBFF.US) share price started the year weakly. It then picked up a little in April, only to fall back again in July.

The shares now change hands around the 1,231p level, showing a 17% fall over the past 12 months compared to a 5% gain for the FTSE 100. And over five years, the bank is down 9% with the FTSE up 40%.

The poor price performance comes partly on fears of an impending Chinese crunch due to overheating lending  and property prices, and partly on the bank’s troubled Korean business. Some are also frustrated by what they see as unclear leadership from chief executive Peter Sands.

Earnings and dividends slipping

Earnings per share (EPS) dropped last year, and though we have two years of recovery forecast, 2012’s level is not expected to be regained before 2016 at the earliest.

That’s put pressure on dividends, which look set to fall this year. Here’s what Standard Chartered’s dividend situation looks like:

(to Dec)
Dividend Yield Cover Change
2010 70c 2.5% 2.81x +6.1%
2011 76c 3.3% 2.61x +8.6%
2012 84c 3.3% 2.43x +10.5%
2013 86c 3.9% 1.96x +2.4%
83c 4.2% 2.15x -3.5%
88c 4.4% 2.24x +6.0%

* forecast

My first thought is that levels of cover are perhaps a little low compared to some in the sector. Barclays‘ cover stood at 2.6 times in 2013, which was a weak year for earnings, and it is expected to rise to above three times this year. But then, Standard Chartered’s cover is actually better than at HSBC Holdings, which is also facing the same pressure over those Chinese fears.

Is a cut necessary?

It’s arguable that Standard Chartered could actually afford to retain its dividend in 2014 and that the City’s prognosticators will prove wrong. But if it does fall, it should only be a modest dip for just one year — and over five years, the dividend would be up 26% by 2015, which is good going.

That highlights an essential factor for long-term dividend investing — we need to look for consistent rises above inflation rather than just strong current yields, especially if we’re laying the foundation for an income portfolio for another 20 years or so.

But what does the company itself say about its dividend?

Ten-year record

Well, it remained pretty tight-lipped about its dividend strategy at first-half time this year, merely stating that its interim payment is “flat at 28.80 cents per share“. But at year-end in 2013 chairman Sir John Peace told us that “The board seeks to grow consistently over time the amount we return to shareholders“, reminding us that Standard Chartered had raised its dividend for 10 years in a row.

We could have a couple of years before Standard Chartered regains a clear forward vision, but dividend yields averaging 4.3% seem like a reasonable payment while we’re waiting.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK owns shares of Standard Chartered. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.