MENU

Is The Yield Worth The Hassle At Centrica PLC, SSE PLC And BP plc?

Electricity and gas providers Centrica (LSE: CNA) and SSE (LSE: SSE) enjoyed a bumper end to last week following the Conservative Party’s romp home in the UK general election. Centrica advanced 8.1% in Friday trade and SSE rose 5.3% after the electoral implosion of Labour, then-leader Ed Miliband, and with it his party’s pledge to take the hammer to the profitability of the country’s largest energy suppliers.

Shares in Britain’s premier power plays have experienced frequent choppiness during the past 18 months or so, even though the City has remained convinced that dividend yields — a major appeal lever across the utilities sector — should continue to smash the opposition.

Indeed, the number crunchers currently expect SSE to follow up an anticipated payment of 88.6p per share for the year concluding March 2015 with rewards of 91.1p and 94.1p in 2016 and 2017 correspondingly. Such figures create market-blasting yields of 5.9% for this year and 6.1% for 2017.

Things are not so rosy over at Centrica, however, and analysts expect the business to slash the dividend for a second consecutive year in 2015, to 12p per share from 13.5p last year. However, this projection still produces a huge yield of 4.7%. And a return to earnings growth next year is predicted to get payouts pumping higher again — a dividend of 12.5p is currently slated, shoving the yield to 4.8%.

Market pressures set to hammer forecasts?

Still, I believe that investors should remain cautious over the prospect of these projections being met. Both firms are seeing smaller, independent suppliers relentlessly chip away at their customer bases, while Centrica, SSE and the rest of the ‘Big Six’ are still facing political and regulatory uncertainty — the Competition and Markets Authority is still investigating the profitability of these firms, while George Osborne’s assertion that “falling oil and gas prices should bring cheaper household bills” suggests the heat from Westminster is not over just yet.

And dividend coverage well below the safety benchmark of 2 times prospective earnings should give income chasers serious cause for concern. Centrica carries a reading of 1.5 times through to the close of 2016, while SSE endures a figure of 1.2 times for fiscal 2016 and 2017.

On top of the troubles across its retail operations, Centrica also faces lasting pressure across its upstream activities as plentiful OPEC supply — not to mention bubbling oil production in the US and Asia — threatens to send crude prices plummeting again after a recent resurgence.

So payouts at previous dividend favourite BP (LSE: BP) (NYSE: BP.US) are also in jeopardy in my opinion. The fossil fuel colossus is expected to keep the dividend on hold at 39.5 US cents per share this year as a confluence of revenues pressure and cash-building initiatives, which also includes heavy asset selling and capex scalebacks, weighs. This payment still generates a 5.5% yield, however, while expectations of a slight earnings uptick in 2016 is anticipated to push the dividend to 41 cents, creating a yield of 5.7%.

But like Centrica and SSE, BP also carries flimsy dividend coverage during this period. Indeed, the estimated payout for this year actually exceeds an earnings forecast of 37.6 cents per share, while coverage registers at just 1.2 times for 2016 despite an anticipated bottom-line surge. In my opinion all three energy plays remain a risk too far for those seeking explosive dividend yields.

So if you are looking for stocks with better payout potential than those mentioned above, I strongly recommend you check out this brand new and exclusive report that highlights a broad range of FTSE winners poised to deliver stratospheric shareholder returns.

Our "5 Dividend Winners To Retire On" wealth report highlights a selection of incredible stocks with an excellent record of providing juicy shareholder returns. Among our picks are top retail, pharmaceutical and utilities plays that we are convinced should continue to provide red-hot dividends. Click here to download the report -- it's 100% free and comes with no further obligation.

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