Today I am looking at three previous payout favourites heading for rocky waters.
The effect of hefty market imbalances across key sectors has seen top line growth at Rio Tinto (LSE: RIO) (NYSE: RIO.US) evaporate in recent years. And with natural resources producers across the globe continuing to ramp up production with a vengeance — Rio Tinto itself is undergoing aggressive expansion across its Australian operations — an environment of subdued prices looks here to stay.
Fears of worsening oversupply were exacerbated by Chinese import data this week which showed iron ore imports edge just 2% during January-March, to 227 million tonnes, a vast slump from the 19% rise punched in the corresponding 2014 period.
Such pressures are expected to push the bottom line at Rio Tinto 41% lower during 2015. However, the City remains in broad agreement that the business is poised to lift the full-year dividend from 215 US cents per share in 2014 to 227 cents, creating a mammoth 5.4% yield. And a 23% earnings uptick is expected to propel the payment to 241 cents next year, driving the yield to 5.8%.
Although an extensive programme of cost-cutting and asset divestments — not to mention larger shipment volumes — have helped to offset the effect of falling commodity prices and keep dividends rising, I believe that Rio Tinto is in serious danger of having to curtail its generous payout policy given the worsening state of its key markets.
Troubled banking colossus Standard Chartered (LSE: STAN) has long been dogged by rumours that a rights issue is simply a matter of time. The Asia-focussed bank’s capital position has come under increased scrutiny as a combination of bad debts, rising compliance costs and huge regulatory fines have weighed. Indeed, pre-tax profits fell by a quarter in 2014, to $5.2bn, and with revenues continuing to struggle StanChart may not have the firepower to keep its generous policy motoring.
Indeed, such pressures are expected to push earnings 4% lower in 2015, following on from last year’s catastrophic 28% decline and consequently driving the dividend to 75 US cents per share from 86 cents during the past two years.
It is worth noting that such a projection still yield 4.6% and, like Rio Tinto, Standard Chartered is expected to register a bottom-line bounceback next year, this time to the tune of 14%. Consequently the bank is expected to push the dividend northwards again, to 77 cents, creating a delicious 4.8% yield.
But like its FTSE compatriot, I reckon the business could struggle to meet these forecasts as its recovery plan is still ratcheting through the gears. Standard Chartered announced a further raft of board changes at the start of April, a move which follows the exit of chief executive Peter Sands the previous month. Until the company gets to grips with its internal structure, not to mention the problems affecting its emerging markets, I reckon dividends could disappoint for some time to come.
Following the monster dividend cut initiated by industry rival Tesco last summer, it comes as no surprise that City analysts expect Sainsbury’s (LSE: SBRY) to follow suit and take the axe to shareholder rewards. Having already advised that “[the] dividend for the full year is likely to be lower than last year, given our expected profitability,” and that sales continue to slide, I believe that the comedown at Sainsbury’s could be calamitous.
Current forecasts suggest that the payout for the year concluding March 2015 is set to register at 12.5p per share, down from 17.3p shelled out in the prior 12 months and prompted by a 23% earnings decline. Expectations of another 14% slip in fiscal 2016 are expected to crush the payout further, to 10.4p, although a slight 1% earnings improvement pencilled in for the following year is anticipated to push the dividend back to 10.7p.
Investors may be tempted to plough in despite these predicted cuts, however, with Sainsbury’s carrying a handy yield of 3.8% through to the close of fiscal 2017.
But with the cataclysmic fragmentation of the British grocery space set to intensify, as both premium and budget outlets aggressively expand in coming years, and the London firm struggling under a huge debt pile — this rose to £2.4bn as of the end of September from £2.2bn a year before — I believe the firm may struggle to deliver juicy payouts looking ahead.
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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. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.