Can Dividend Projections For BHP Billiton plc, Royal Dutch Shell Plc And WM Morrison Supermarkets PLC Really Be Believed?

Today I am looking at three dividend stocks I believe are on fragile ground.

BHP Billiton

Despite the effect of crumbling commodity prices, mining giant BHP Billiton (LSE: BLT) has managed to keep the dividend rolling higher even in times of severe earnings turbulence. Indeed, the digger has raised the payment at a compound annual growth rate of 8.6% during the past five years.

And the City is in broad agreement that this trend is set to persist — Investec for one expects BHP Billiton to hike the full-year payout from 121 US cents per share last year to 127 cents in 2015, producing a mighty yield of 6.1%. And a further dividend raise in 2016, to 133.3 cents, is pencilled in for next year, creating a yield of 6.4%.

It is true that a steady stream of asset divestments, not to mention the firm’s cost-cutting initiatives across the business, has enabled BHP Billiton to finance such bumper shareholder payouts. Still, I believe that investors should be aware that expected earnings slumps this year and next provide inadequate dividend coverage of just 1.3 times and 1 times for 2015 and 2016 correspondingly, well below the safety benchmark of 2 times.

And with weakness set to persist across its key markets — indeed, iron ore prices dived below $50 per tonne again last week, and have shed more than a half of their value during the past year — I believe BHP Billiton’s generous payout policy could come under pressure. Project divestments cannot go on indefinitely, after all.

Royal Dutch Shell

Like BHP Billiton, fossil fuel play Shell (LSE: RDSB) (NYSE: RDS-B.US) also faces the prospect of prolonged earnings pain as a result of severe supply/demand imbalances. This is a view shared by the number crunchers, with consensus suggesting that the oil giant is set to endure earnings pain of 36% in 2015.

Although a 36% uptick is expected the following year — a highly unlikely scenario in my opinion given that OPEC and US shale production continues to soar — the effect of top-line weakness on Shell’s balance sheet is expected to keep the total dividend locked around 188 US cents per share both this year and next. These projections create a chunky yield of 5.9% through to end-2016.

Like much of the oil sector, Shell is undergoing vast operational scalebacks and announced 250 more job cuts late last month in the North Sea. With its capex budget also likely to come under pressure as falling revenues cause the balance sheet to bend, I believe shareholder rewards could fall short of forecasts — projected earnings barely covering the dividend this year, and coverage of 1.4 times in 2016 hardly helps matters, either.

WM Morrison Supermarkets

Despite customers continuing to flock to its rivals in their droves, Morrisons (LSE: MRW) has so far resisted the temptation of cutting the dividend and in March elected to raise the total payment to 13.65p per share in the year concluding February 2015, up from 13p in the previous year.

Analysts expect this to represent a final hurrah for Morrisons’ progressive dividend policy, however, and consensus points to a full-year reward around 6.3p for both fiscal 2015 and 2016. Such projections still create a decent yield of 3.2%, but represents a sharp comedown from those of previous periods.

And I believe that even these forecasts could be a step too far. The company has still to get to grips with the rise of the discount and premium chains, while mid-tier compatriot Tesco’s recent rebound is also causing headaches — latest Kantar Worldpanel stats showed Morrisons’ revenues slide an extra 0.4% in the 12 weeks to March 1.

With the retailer’s growth areas of online and convenience beset by intensifying competition, and Morrisons’ capex cutbacks also illustrating the stress on the balance sheet, I believe that payouts could fall short of current expectations.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK owns shares in 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.