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Are The Yields Worth The Trouble At J Sainsbury plc & Centrica PLC?

Today I’m looking at two London stocks with less-than-robust dividend outlooks.

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There’s no doubt that Sainsbury’s (LSE: SBRY) has been the most impressive performer of the so-called ‘Big Four’ supermarket chains in recent months. While Tesco, Morrisons and Asda have continued to haemorrhage customers, Sainsbury’s has managed to stop the rot and actually post a mild uptick in takings.

Indeed, Kantar Worldpanel advised that sales at the London firm advanced 1.2% in the 12 weeks to 6 December, pushing its market share to 16.7% from 16.5% a year earlier. By comparison those FTSE 100 peers Morrisons and Tesco saw their revenues slumping 2% and 3.4%, respectively, during the period.

Sainsbury’s has performed better than its rivals thanks in no small part to the huge investment in its Taste The Difference premium ranges, while its higher concentration in the south of England is also allowing it to reap the benefits of this economically-stronger region.

But investors shouldn’t forget that Sainsbury’s is having to keep on slashing prices at the expense of profits to keep its head above water. And this situation is likely to get worse as Aldi and Lidl, value-focused rivals whose sales rocketed 15.4% and 17.9%, respectively, in the last three months, get their ambitious expansion plans off the ground.

As a result, earnings at Sainsbury’s are anticipated to head 16% lower in the year to March 2016 alone. Consequently a second consecutive dividend cut is likely to be heading down the tracks. Indeed, the City expects last year’s dividend of 13.2p per share to fall to 10.7p in fiscal 2016.

Sure, a 4.4% yield may be tempting enough for many investors. But while intensifying competition continues to batter the bottom line and debt levels keep nudging steadily higher, I believe even more dividend cuts could be on the cards over at Sainsbury’s.

The lights are dimming

Like Sainsbury’s, I believe energy colossus Centrica (LSE: CNA) is not for the faint of heart thanks to its precarious revenue prospects.

The relentless rise of cheaper, independent suppliers has steadily crushed the British Gas owner’s customer base in recent years, their promotion-led strategies encouraging households to switch suppliers with increasing gusto.

On top of this, the firm’s Centrica Energy upstream division continues to suffer the effects of falling crude prices. Iindeed, Brent crude sank to fresh 11-year troughs of around $36 per barrel just last week. And the prospect of further dips would appear to be in the offing as insipid oil demand across the globe fails to suck up abundant supplies.

With Centrica predicted to endure an 8% earnings fall in 2015, the City expects the firm to cut the dividend for a second consecutive year. A proposed payment of 12p per share represents a sizeable reduction from 2014’s 13.5p reward, although this still yields a very decent 5.7%.

Still, given Centrica’s patchy earnings outlook, I reckon the stock is a precarious selection for those seeking chunky long-term returns.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended Centrica. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.