Today I am running the rule over the payout potential of three FTSE-listed heavyweights.
Royal Dutch Shell
Despite the terrifying prospect of worsening market imbalances on the top line, the City’s army of analysts remain convinced oil heavyweight Shell (LSE: RDSB) should keep delivering market-beating dividends. Current forecasts suggest a reward of 188 US cents for 2015 — matching the payout forked out last year — and 189 cents in 2016, both yielding an impressive 6.6%.
However, predicted dividends for this year and next indicate the massive stress Shell is currently facing, with static payout growth marking a significant sea change from previous years. By contrast, Shell has lifted the payout at an annualised rate of 4.6% since 2012 alone. And credit agency Standard and Poor’s sounded the alarm this week by cutting the firm’s credit rating due to expectations of prolonged oil price weakness — Brent remains stuck at multi-month lows around $56 per barrel, with an unexpected rise in US inventories this week exacerbating fears of oversupply.
Earnings at Shell are expected to erode 33% in the current year alone, leaving dividends covered just 1.1 times, well below the security watermark of 2 times. Shell has slashed its capex budget and made huge divestments to conserve cash, a sensible strategy in the current climate. But conversely, such measures hardly do the firm’s earnings — and subsequently dividend — prospects any favours looking further down the line. In this environment I believe Shell is a risk too far for income chasers.
However, I believe the dividend outlook at electronics provider Premier Farnell (LSE: PFL) is far more promising. Despite releasing a string of positive trading statements in recent months, fears over economic cooling in China has seen the stock dive 16% from the middle of May.
Still, I reckon weak investor sentiment is wide of the mark considering that revenues continue to stamp higher across the globe — indeed, tech demand from the Asia-Pacific region alone leapt 16.2% during February-April, accelerating from 13.6% in the prior three months. With this in mind, the City expects earnings to start chugging higher again after four consecutive annual dips, a promising omen for the firm’s dividend policy.
A reward of 10.5p per share is currently slated for the year ending January 2016, a tentative advance from the 10.4p payment chucked out for the past five years but still yielding an impressive 6.2%. And an improving bottom line is expected to push the dividend to 10.8p in 2017, yielding 6.3%. Although dividend cover comes in at around 1.5 times for these years, I believe galloping demand for Premier Farnell’s unique products — combined with stringent cost-cutting — should underpin these projections.
As one would expect, deafening chatter over macroeconomic cooling across its critical Asia Pacific regions, combined with the effect of huge legal penalties for previous misconduct, have rocked investor appetite for HSBC (LSE: HSBA) in recent months, and in particular confidence in the size of dividends moving forwards.
The financial giant has long been a magnet for those seeking electric dividend yields, and the City does not expect this reputation to come under pressure any time soon despite the aforementioned issues. Indeed, expectations of a 51-US-cent-per-share payment this year produces a mammoth yield of 5.7%. And this rises to 5.9% for 2016 amid predictions of a 53-cent dividend.
Even though dividend coverage of 1.6 times through to the close of next year hardly blows one’s socks off, I believe investors can take confidence from HSBC’s hefty capital pile — the bank’s core tier 1 capital ratio rang in at a robust 11.2% as of the end of March. And with revenues expected to keep surging from Hong Kong, and a new cost-cutting initiative rolled out just last month, a sustained period of earnings growth appears on the cards, a terrific sign for future dividends.
Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended HSBC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.