Can Dividend Projections At Centrica PLC, J Sainsbury plc And Soco International plc Really Be Believed?

Today I am looking at the outlook for three of the FTSE’s big dividend payers.


I am convinced energy giant Centrica (LSE: CNA) is one of the most perilous stock picks on the market for those seeking market-busting dividends. The company was forced into slashing the payout last year thanks to significant earnings weakness, and a further reduction in 2015 — from 13.5p per share in 2014 to 12p — is currently predicted by the City.

Such a projection could still prove irresistible to hungry yield hunters, the payment producing a juicy readout of 5.2%. And expectations of a modest earnings improvement at Centrica in 2016 is predicted to herald a resurrection in the firm’s progressive dividend policy, with a predicted reward of 12.4p yielding a chunky 5.3%.

However, I believe investors should give these optimistic estimates short shrift as Centrica’s upstream and downstream operations should continue to drag. Indeed, just last month Standard and Poor’s cut its rating on the business thanks to “low commodity prices and a competitive retail environment.” And with predicted dividends protected just 1.5 times by predicted earnings through to end-2016, I reckon income seekers could end up disappointed.

J Sainsbury

Thanks to the increasing fragmentation of the British grocery sector, Sainsbury’s (LSE: SBRY) — like Centrica — is anticipated to take the hatchet to the annual payout for a second successive year. A projected dividend of 10.7p per share for the 12 months ending March 2016 would represent a hefty reduction from 13.2p in the previous period, and the bad news does not end there as a further reduction, to 10.5p, is forecast for fiscal 2017.

On the upside these forecasts still generate chunky yields of 4.5% and 4.6% correspondingly, smashing the FTSE 100 average of 3.5% by some distance. And even though the bottom line is expected to keep on tanking, dividend coverage over at Sainsbury’s still registers bang on the safety watermark of 2 times estimated earnings.

But with the competition continuing to ramp up its attack on the established retailers — Lidl announced plans late last week to unveil 300 new stores in Greater London, one of the most critical regions for Sainsbury’s — I believe earnings could fall even greater than expected, a worrying omen for dividends. When you throw in rising online competition and fears over slowing convenience store activity, I reckon shareholders in Sainsbury’s are standing on shaky ground.

Soco International

Like Centrica, I believe that the impact of weak oil prices threatens to hammer the dividend prospects over at Soco International (LSE: SIA). Crude prices have recovered from the six-year troughs of $42.50 per barrel printed in August, but with newsflow from China continuing to disappoint and global output remaining resilient, I believe black gold prices are in danger of shuttling lower once again.

Soco saw pre-tax profits slump to $32.7m during January-June from $174.7m in the corresponding 2014 thanks to the sinking oil price. Despite this, the business was still able to pay a dividend of $51m, a position that many oil explorers would saw off their right arm to provide. But thanks to the capital intensive nature of Soco’s operations, I believe that future dividends could come under intense pressure as the company burns through cash.

The business reported negative free cash flow of $19.9m for the first half, swinging from a positive reading of $64.8m a year earlier — reduced production and oil prices, combined with the costs of its H5 asset in Vietnam, weighed heavily. The City currently expects last year’s 15.58 US-cent-per-share dividend to fall to 10.7 cents in 2015 and 6.3 cents next year, resulting in yields of 4.5% and 2.7% for this year and next. But do not rule out even heftier reductions as the oil market deteriorates.

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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.