Today I am looking at the investment potential of four big FTSE payout plays.
Fossil fuel giant BP (LSE: BP) has long been a magnet for those seeking dependable dividend growth — the firm has lifted the full-year payment at an annualised rate of 17% during the past five years even in spite of frequent earnings pressure. But the industry’s major players are now facing an inflection point, with talk of a return to $100 per barrel giving way to expectations of further plunges way below current multi-year troughs around $42.
The seriousness of the supply/demand imbalance on future revenues has been underlined by the scale of capex reductions and cost-cutting across the industry, and BP’s own measures suggest the balance sheet is not as robust as it once was. Indeed, the City currently expects the business to axe its progressive policy this year and keep the dividend locked at 39.6 US cents per share. Although this still yields an impressive 7.6%, I believe investors should resist the allure of diving in as further oil price weakness could put paid to these projections.
I am convinced that clothing superstar Next (LSE: NXT) should continue to deliver plump payouts to shareholders as High Street conditions keep on improving. Latest Office of National Statistics data showed UK retail sales rise 0.2% in August from the previous month, with sales of textiles, clothing and shoes galloping 2.3% higher. Shopper confidence continues to improve on the back of growing wage packets, rising employment and persistently-low inflation.
While these factors should continue driving sales at Next well into the future, the firm’s massive investment in its Next Directory should also pay off handsomely as consumers increasingly switch to the internet to buy their togs. With earnings consequently expected to keep on rolling, the number crunchers have pencilled in a dividend of 398.1p per share for the year ending January 2016, yielding a mightily-impressive 5.3%.
Like BP, I believe Centrica (LSE: CNA) is in severe danger of disappointing dividend hunters thanks to the spectre of lasting revenues pressure. The company is also enduring the wrath of pressured oil and gas prices on its upstream operations, and adjusted operating profit at Centrica Energy hurtled 78% lower during January-June to £116m.
With problems also intensifying at its British Gas arm — the firm was forced to cut prices a further 5% in July due to rising competition — and net debt standing at a gargantuan £4.9bn, Centrica elected to cut the interim dividend by almost a third, to 3.57p per share. Not surprisingly the City expects a second consecutive full-year cut to occur in 2015, although an anticipated 12p reward still yields an attractive 5.3%. But with Standard and Poor’s credit downgrade in August again underlining Centrica’s poorly financial health, I believe risk-averse investors should continue to give the energy play short shrift.
Again, thanks to the deteriorating state of the oil and gas market I believe speciality chemicals producer Elementis (LSE: ELM) carries an unacceptable level of risk. The company saw sales tumble 10% lower in January-June because of “the ongoing weakness in oil prices and the subsequent reduction in drilling and exploration in North America,” while Elementis was also whacked by destocking in China in anticipation of weakening market conditions.
But with major oil producers having vowed to scale back spending even further since then, and economic conditions in China continuing to steadily worsen, the situation at Elementis looks set to become even more grave. So although the City has chalked in a dividend of 17 US cents per share for 2015, producing a chunky yield of 5.1%, I for one am not convinced that the industrial play will meet such a forecast.
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Royston Wild owns shares of Next. The Motley Fool UK has recommended Centrica and Elementis. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.