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Are The Yields Worth The Aggro At Anglo American plc, BP plc And J Sainsbury plc?

Today I am looking at the payout prospects of three FTSE 100 giants.

Anglo American

Despite predictions of eye-popping dividend yields, the market is quite wisely refusing to bite into Anglo American (LSE: AAL) and the digger’s share price continues to languish around record lows. Investors have been less than enthused by news on Thursday that Paulo Castellari, its Brazilian iron ore chief, was stepping down, while a major shake-up of its sales and marketing operations has also failed to grab the imagination.

And this comes as little surprise as commodity prices keep on sinking. Just this week Fortescue Metals’ chief executive Andrew Forrest warned that “it could well get darker before it gets brighter in the iron ore industry,” adding that the metal — by some distance Anglo American’s largest single market — is likely to trade in the $40 per tonne bracket for some time yet.

With other key commodities like diamonds, coal and copper also heading south, Anglo American is expected to cut the dividend to 65 US cents per share in 2015, down from 85 cents in recent years. Although many will still be suckered in by the 8.8% yield, an anticipated 52% earnings decline leaves this estimate covered just 1.3 times, well below the safety watermark of 2 times.

And given the firm’s hulking debt levels, I believe wily investors should give current payout projections scant regard.

BP

Like Anglo American, battered oil colossus BP (LSE: BP) also continues to suffer from worsening commodity market imbalances. The Brent crude benchmark is trading within a whisker of fresh multi-year lows below $45 per barrel, with OPEC comments concerning rampant global oversupply — and news that US stockpiles rose for a seventh straight week — weighing on market sentiment once more.

Energy prices have also trended lower due to the steady slew of disappointing data coming out of China. Indeed, General Administration of Customs data released at the weekend showed crude imports slump 8.8% month-on-month in October, to 26.35 million tonnes, further underlining the economic slowdown being endured in Beijing.

With producers the world over continuing to enthusiastically pump despite these poor demand signals, I believe City expectations of a 59% earnings rise at BP in 2015, to 33 US cents per share, are well, well wide of the mark. But even if these are correct, a projected dividend of 40 US cents — yielding 6.7% — still outstrips earnings by some distance.

While BP can still rely on its vast cash pile to furnish investors with chunky payments in the near-term, helped by the positive impact of capex reductions and asset sales, I reckon the dividend will take a hit at some point as the world is likely to swim in excess oil for some time to come. I believe the business remains a high-risk selection for both earnings and dividend seekers.

J Sainsbury

I am less than enthusiastic concerning the dividend outlook over at Sainsbury’s (LSE: SBRY), either, as a combination of grocery price deflation and rising competition smashes the bottom line. The supermarket announced this week that like-for-like sales (excluding petrol) slipped a further 1.6% during April-September, to £13.6bn, and that underlying pre-tax profit slumped 17.2% to £308m.

The determination of Sainsbury’s to take the fight to cut-price competitors Aldi and Lidl, not to mention fight off mid-tier rivals Tesco and Morrisons, is playing havoc with the company’s margins. Indeed, the supermarket’s retail underlying operating margin dropped 39 basis points in the period, to 2.71%. And while Sainsbury’s is holding up well in the convenience store and online segments, the bloody ‘price wars’ continue to cast a pall over future profitability.

Consequently the City expects the business to endure an 18% earnings drop in the year to March 2016 alone, a situation that is likely to push the full-year dividend lower yet again — a reward of 10.8p per share is currently forecast, down from 13.2p in 2015. This still yields a handsome 3.9%, but with Sainsbury’s facing an uncertain future as the competition ups the ante, I reckon investors should resist taking the plunge at the current time.

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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.