Chasing yield can be a risky sport. So, to try and help investors from cashing unsustainable dividend yield, investment bank Société Générale publishes a monthly list of “high dividend risk companies” across developed markets.
Companies that make in onto the list have a dividend yield of 4% or more and a lower-than-average Merton score — a measure of credit risk and financial stability.
Here are the five UK companies that pass the screen, and, as a result, according to Société Générale, are most likely to cut their dividend payouts.
Payout concerns
Renewable energy company Infinis Energy (LSE: INFI) is no stranger to dividend concerns. The company is promising a dividend payout of around 18.50p per share for each of the next three years.
That gives a dividend yield of around 10% at present, but the payout isn’t covered by earnings per share. This year the company is set to pay out around 140% of earnings to shareholders.
Infinis’ annual payout will cost the company around £50m per annum. But with only £66m of cash on the balance sheet at the beginning of this year and net debt of £554m, it looks as if the company will struggle to keep up its extravagant dividend policy.
Management guarantee
Miners feature heavily on Société Générale’s list of high dividend risk companies.
Both Vedanta Resources (LSE: VED) and Anglo American (LSE: AAL) make it onto the list due to falling earnings and weak balance sheets.
Vedanta’s dividend yield currently stands at 6.2%, although the company is set to make a loss this year. Moreover, Vedanta’s net debt to equity ratio stands at a staggering 530%.
However, Vedanta’s management has stated that it intends to maintain the company’s dividend payout at present levels. So, the dividend may be safe, but Vedanta’s financial situation is precarious.
Anglo’s dividend yield is set to top 5.2% this year, and according to estimates the payout will be covered by around 1.3 times by earnings per share.
Still, Anglo has reported a net loss for each of the past three years, and there could be additional losses to come.
Anglo’s production costs are far higher than peers, and one of the company’s key projects is already three times over budget. That said, the company is currently trying to sell its iron ore arm, which could give it much needed cash infusion.
Digging deeper
Dairy Crest (LSE: DCG) makes the list of high dividend risk companies, but it’s difficult to see why. The company’s dividend payout of 21.7p per share equates to a yield of 4.3%. The payout is covered twice by earnings per share.
Nonetheless, if you dig a bit deeper, it’s clear why Dairy Crest has made the list.
Dairy Crest’s return on assets has halved over the past six years. Shareholder equity has slumped by 30% since 2009, and after stripping out exceptional items, the group’s dividend is only covered 1.2 times by earnings per share. These numbers signal that the company is struggling.
Oil dependant
Lastly, Amec Foster Wheeler (LSE: AMFW) which has made it onto the list following the oil price slump. The company is set to yield 4.8% this year and the payout is covered twice by earnings per share.
However, the sustainability of Amec’s payout is dependent upon the demand for the company’s services, which is correlated to the price of oil. So, if the price of oil starts to push higher, Amec’s payout is likely to become more secure.
