Will BP plc & HSBC Holdings plc Follow Tesco PLC And Cut Their Dividends?

Tesco PLC (LON:TSCO) has set a dangerous precedent for management at BP plc (LON:BP) and HSBC Holdings plc (LON:HSBA), says Harvey Jones

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

bpEven when a dividend cut has been heavily trailed, it always comes as a shock when it finally happens. That’s certainly the case with Tesco (LSE: TSCO). 

People knew the survival of the dividend was in doubt, but that didn’t stop the share price from plunging sharply on the day. What made it worse was the scale of the cut, a brutal 75%. Few expected something quite so drastic.

New boss Dave Lewis has a long way to go to restore investor confidence. Especially with the spectre of sectoral decline looming heavily.

Latest figures show wages rising at a meagre 0.6% a year. If Lewis does trigger another price war, he will have to cut deep to make hard-up shoppers feel like their money really is stretching further.

Axeman Cometh

Worse, even when the bad news had been absorbed, Tesco’s share price has continued to slide. Which should worry anybody holding shares in BP (LSE: BP) (NYSE: BP.US) and HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US), because both companies have an axe hovering over their dividends.

The blow would be particularly bitter for BP investors, as its dividend was only restored recently, after being axed in the immediate wake of the Deepwater Horizon tragedy.

Now it is under threat again, following the recent US district court ruling that found BP guilty of “gross negligence” paving the way for another $18bn of fines.

BP is going to appeal, but if it loses its profits will inevitably take a hit, and investors will foot the bill, as its dividend and share buyback programme may be scaled back or possibly even scrapped.

Analysts are already predicting that BP’s cash flow could be flat over the next few years at around $31bn. That should be enough to cover its $25bn capital expenditure programme, but leaves little scope for dividend progression.

We may learn more next month, when BP posts its Q3 results. But the US appeal will no doubt drag on, and continue to cast a shadow over BP’s share price.

Today’s duty 4.8% yield can’t be relied on.

I Feel Fine

Ace dividend investor Neil Woodford was the first to publicly raise the danger of HSBC being forced to cut its dividend, as a result of regulatory “fine inflation”.

He thought the risk was so great, he dumped the stock, the last remaining bank he was holding.

Since HSBC is the world’s largest banking and financial services group, it is most at risk from fine inflation if regulators set their penalties according to company size.

Woodford warned that an ongoing investigation into the historic manipulation of Libor an foreign exchange markets, serious offences if found true, could hit HSBC’s ability to grow its dividend.

All the banks face a ceaseless flow of fines, especially from the US, which continue to eat away at profits. Only last week, HSBC agreed to pay $550m to settle a lawsuit filed in 2011 by the Federal Housing Finance Agency, over mortgaged-backed securities sold in the run-up to the financial crisis. 

HSBC’s dividend, currently yields 4.5%, covered 1.7 times, was already said to be under threat, following last month’s disappointing interim results, which showed a 12% drop in reported pre-tax profits to $12.3bn.

Now it is in even greater danger.

Shock Doctrine

While I wouldn’t expect HSBC to slash its dividend by as much as 75%, future growth could be disappointing. BP’s dividend is in the lap of the legal gods.

Anybody considering buying these two companies must brace themselves for a shock.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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

More on Investing Articles

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »