These should be marvellous times for income seekers, with top FTSE 100 stocks offering yields of anything up to 12% a year, up to 1300 basis points above the inflation rate. But experienced investors know that high yields are also a sign of trouble, and plenty have already been cut this year. So where do these three stand?
Cheap Talk
Management at troubled supermarket WM Morrison (LSE: MRW) pledged themselves to the company’s dividend as the yield headed towards 7% but talk is cheap in the middle of a cut-throat price war. They bowed to the inevitable in March, slashing the dividend after the worst set of results in eight years.
Morrisons is now on a forecast yield 3.3% for 2016, which at least has the virtue of being rather more manageable, although I can’t say the same for Morrisons as a business. Halfway through its £500m three-year plan it is still losing customers to the German discounters, and slashing prices further can scarcely help since that is a game everybody is playing. Earnings per share were 23.08p in the year to February 2014, by January they will have collapsed to 9.14p. I believe that Aldi and Lidl can only gobble up so much market share until their limitations catch up with them, but they haven’t reached that point yet. Morrisons is still a sell.
Dutch Courage
I dumped struggling oil giant Royal Dutch Shell (LSE: RDSB) 18 months ago and have no complaints with the stock down 25% since then. Cheap oil is the obvious culprit and there is little sign of revival right now with a barrel of Brent trading at $45. That may increase next year as Opec members feel the strain and the money supply bursts into life as Chinese, Japanese and European liquidity floods the markets. The cycle has to turn at some point.
When it does, today’s valuation of 8.46 times earnings will look a juicy one. Shell’s 7.06% yield will look juicier still. Oil will rise, the question is when, and how far. US shale triggers are nimble, and can quickly de-mothball their wells once oil tops $60, so I don’t expect a spectacular rebound. Shell could struggle to keep pumping out its dividends at today’s levels, losses like the $6.1bn it posted in the third quarter can’t be sustained forever. The yield is finely balanced: are you ready to gamble?
Slipping Standard
Like Morrisons, Asia-focused bank Standard Chartered (LSE: STAN) has already bitten the dividend bullet, halving its payout this summer. Down 43% in the last six months, it remains in serious trouble. It now trades on a forecast yield of just 2.6% and now investors also have to do deal with its upcoming £3.3bn rights issue, which will greatly dilute their shareholdings.
Nobody is buying Standard Chartered for the dividend these days, only for the contrarian growth opportunity. Chief executive Bill Winters, who took over in June, is facing up to grim reality and has drawn up a plan to deliver a leaner and hopefully cleaner bank. He has a long journey ahead of him, and it may be too early for investors to join in for the ride. The bank is priced at just 6.15 times earnings for a very good reason.
