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Do The Potential Rewards Outweigh The Risks At Big Yielders BP plc, SSE PLC And J Sainsbury plc?

Today I am looking at three London laggards poised to deliver fresh investor pain.

BP

Shares in BP (LSE: BP) have shot higher in recent days after the US Justice Department announced a final settlement related to the 2010 Deepwater Horizon spill. Sure, the final amount is mind-boggling — the business will pay a record $20.8bn in fines, and takes the total costs for the disaster to a colossal $53.7bn. But the decision allows BP to finally move on and get back to the business of pumping oil.

However, I believe the black gold giant still has significant problems to overcome to get profits moving back in the right direction. US crude stocks once again rose ahead of expectations last week, the EIA advised, leaping 3.1 million barrels week-on-week to some 461 million. As OPEC remains determined to defend market share, North American shale output rises and Russia hikes its own production, the chronic market oversupply is unlikely to disappear any time soon.

So quite why the City expects BP to continue shelling out market-beating dividends is beyond me, I’m afraid. A predicted payout of 39.5 US cents per share for 2015 would put paid to the firm’s progressive dividend policy, but still yields an exceptional 7.4%. However, BP’s desperate efforts to conserve cash through asset sales and steady capex reductions illustrates the huge stress on the balance sheet. And with oil prices in danger of fresh weakness, I reckon current dividend estimates could miss wildly.

SSE

Like BP, I reckon that a poorly revenues outlook threatens to derail dividends at SSE (LSE: SSE). Utilities have long been a haven for those seeking strong income flows thanks to the essential nature of their operations. But with regulators getting increasingly tougher with what water and electricity suppliers charge households, the earnings — and consequently dividend outlook — of these businesses stands on extremely shaky ground.

Added to this, SSE and its peers are failing to get to grips with customers leaving of their own volition. Prompted by huge campaigns from consumer groups and politicians to switch suppliers, and facilitated by the rampant growth of independent operators, SSE continues to lose clients at an alarming rate — a further 90,000 accounts were lost between April and June.

The number crunchers expect SSE to endure a 10% earnings slip in the 12 months to March 2016 thanks to such travails. Despite this, the firm is still expected to increase the dividend to 90.3p per share from 88.4p in the previous period, creating a mighty 5.9% yield. But given the threat of persistent top-line pressure, not to mention the threat of draconian legislative action, I believe SSE could disappoint dividend seekers in the near-term and beyond.

J Sainsbury

It comes as little surprise that supermarket giant Sainsbury’s (LSE: SBRY) is expected to slash the dividend yet again in the current year as profits remain under sustained pressure. Amid predictions of a second successive earnings dip in the year to March 2016, the grocer is expected to cut shareholder rewards to 10.6p per share from 13.2p in fiscal 2015.

Many investors will still be drawn in by the market-beating yield of 4.1%, however, while the firm’s ‘bubbly’ trading update last month has also boosted buyer appetite. Sainsbury’s upped its profit forecasts for the current year, commenting that the bottom line is likely to be “moderately ahead” of initial broker estimates of £548m. This is far from cause for celebration, in my opinion — rather, stock pickers should be paying more attention to a further 1.1% decline in like-for-like sales in the latest quarter.

The London firm has failed to get to grips with the steady march of Aldi and Lidl despite years of plugging away at the problem. Relentless price cuts are failing to stop customers flocking to its discount rivals, while Sainsbury’s is also failing to compete with the likes of Waitrose and Marks & Spencer in terms of product quality, either. Until Sainsbury’s finds a way to remain relevant to UK shoppers, I believe the business is a risky bet for those seeking chunky returns.

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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.