Today I am looking at three dividend stocks I believe are on extremely dodgy footing.
In my opinion SSE (LSE: SSE), like the majority of Britain’s utilities giants, is at great risk of disappointing dividend hunters as regulatory pressure ratchets higher. The company remains the subject of a Competition and Markets Authority investigation into claims of excessive profitability, and many — from politicians, the media and consumer groups alike — are even going so far as to call for the break-up of the country’s largest suppliers.
These pressures are unlikely to disappear any time soon, and SSE’s recent failure to cut tariffs in line with declining wholesale energy prices has sent even more disillusioned customers into the arms of its smaller, independent competitors. Considering these problems, the City expects the business to record a 12% earnings decline in the 12 months ending March 2016, although a 5% recovery is anticipated for 2017.
The power play is expected to keep its progressive dividend scheme on track during this period, with payouts of 90.8p per share this year and 93.6p in 2017, producing market-mashing yields of 5.5% and 5.6% respectively.
However, I believe that too much uncertainty continues to swirl around SSE’s earnings levels looking ahead, and with dividend cover registering at just 1.2 times through to the close of next year — well below the security watermark of 2 times — I reckon that current forecasts are built on shaky foundations.
Embattled bank Standard Chartered (LSE: STAN) was forced to keep the full-year dividend locked at 86 US cents per share in 2014 as a 28% earnings dip exacerbated existing pressure on the balance sheet. And with the bottom line expected to slip a further 3% this year, StanChart is anticipated to finally bite the bullet and cut the payment to around 77 cents.
In rosier news, however, the City expects a 14% earnings bounce in 2016 to get the dividend chugging higher again, to 79 cents. And for many income hunters Standard Chartered may still represent an exceptional buy, with the business sporting huge yields of 4.7% and 4.8% for 2015 and 2016 correspondingly.
However, I believe that current projections could fall disastrously short as bottom-line performance threatens to disappoint for some time to come. The emerging market-centred bank continues to experience revenues struggles in territories like Korea and Thailand, and is frantically divesting assets in order to cut its exposure. It also faces the prospect of further financial penalties owing to previous sanction breaches.
On top of this, StanChart’s refusal to divulge its capital ratio in last month’s interims raises further questions over the financial health of the bank and naturally the dividend outlook. Like SSE, I believe that the firm is an extremely-risky stock selection.
Fossil fuel explorer Dragon Oil (LSE: DGO) attracted the headlines last week after majority shareholder Emirates National Oil Company (or ENOC) put in a 735p-per-share offer to acquire the 46.1% stake it does not already hold. The company’s minority investors have a history of rebuffing such approaches, however — even if industry pressures make the current proposal a particular appetising one — so the success of ENOC’s latest move is far from a foregone conclusion.
The calculator bashers expect Dragon Oil to suffer a colossal 46% bottom-line decline in 2015 due to crushed crude prices, a result expected to drive the total dividend from 36 US cents last year to around 32 cents. However, a 33% earnings bounce next year is projected to shove dividends skywards once more, and a 34-cent reward is currently estimated. These estimates produce chunky yields of 3.6% for the current year and 3.9% for 2016.
I am not so convinced by such estimates, however, given that oil prices are in severe danger of languishing for some time to come as the market imbalance continues. Dragon Oil’s decision to slash 2014’s final dividend illustrated the impact of revenues stresses on the balance sheet, as did the company’s decision to can a takeover of Petroceltic International a few months earlier.
And although Dragon Oil’s cash and equivalents stood at a meaty $1.9bn as of March, the huge investment the Dublin firm has earmarked for exploration, drilling and infrastructure work could heap further pressure on dividends 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.