Today I am scrutinising the investment prospects of three of the FTSE’s biggest payout plays.
Royal Dutch Shell
Fossil fuel colossus Shell (LSE: RDSB) has long been a haven for those seeking chunky dividends, a combination of surging global oil demand and vast cash flows helping to deliver splendid investor returns. And despite growing concerns over a chronic market imbalance, the City expects yields to remain on the generous side.
A reward of 188 US cents per share is currently touted for Shell’s shareholders for both 2015 and 2016, putting paid to the firm’s progressive policy but still yielding a very handsome 7.6%. However, I believe investors should give such projections short shrift — with these forecasts covered just 1.1 times by potential earnings, further crude price woes could put proposed dividends to the sword.
And Shell’s balance sheet can hardly be described as bulletproof any more, either, adding further pressure to future payments. The firm saw operating cash flow decline to $6.1bn during April-June versus $8.6bn a year earlier, and its decision to slash another 6,500 jobs from its ranks illustrates the pressure Shell is facing in the low-price environment. On top of further asset sales and capex cuts, I reckon the oil giant will be forced to constrain investor rewards unless revenues pick up soon.
Likewise, I believe that Vedanta Resources (LSE: VED) could be forced into cutting shareholder rewards as a result of deteriorating commodity prices. The company has so far resisted the temptation despite recent heavy earnings declines, with dividends rising steadily despite four consecutive adverse annual performances.
But the City expects this trend to keep rolling for the near future at least, and last year’s payout of 63 US cents per share is anticipated to rise to 65 cents in the 12 months to March 2016, yielding a mighty 8.2%. Vedanta’s payout forecasts are a little murkier further out, however, and the number crunchers currently estimate a dividend of 63 cents in 2017, although this still yields a not-too-shoddy 8%. I am far from optimistic concerning either of these forecasts, however.
Vedanta was forced to swallow a $3.1bn writedown on the value of its Cairn India energy subsidiary during the first quarter, reflecting the intensifying pressure in its key markets like oil and iron ore that have forced revenues to deteriorate. And with the firm’s net debt pile also clocking in at an eye-popping $8.5bn as of March, I believe Vedanta is a risk too far for those seeking nailed-on dividend darlings.
Unlike the two resources plays mentioned above, I believe motor insurance mammoth Admiral (LSE: ADM) should prove a lucrative stock selection in the years ahead thanks to an improving market backdrop. Indeed, the company is expected to shell out a dividend of 94.1p per share in 2015, yielding a brilliant 6.1%, and this figure rises to 6.3% for next year thanks to a 96.2p forecast.
The Cardiff business — which also boasts the Elephant and Diamond brands — saw pre-tax profits edge 1% higher during January-June, to £186.1m, helped by a first rise in car insurance premiums for three years. But arguably the key takeaway from Admiral’s results was a chunky drop in claim costs, bucking conditions in the wider industry and a phenomenon that the business put down to a rising emphasis on courting older drivers and ‘safer’ parts of the UK.
A steady rise in Admiral’s customer base — this advanced 6% during the period to some 4.19 million — helped to drive the bottom line, too, underpinned by the firm’s terrific ability to generate repeat business. And with the company’s operations in Europe and the US also steadily improving, I believe Admiral is in great shape to keep on delivering blockbuster investor payouts.
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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.