BHP Billiton plc & Banco Santander SA: Dividend Dynamos Or Payout Perils?

Today I’m looking at the dividend prospects of two FTSE giants.

Digger on the defensive

I’m convinced that metals and energy giant BHP Billiton (LSE: BLT) will be forced to slash dividends in the near future as worsening oversupply across all of its key markets smacks earnings.

Broker UBS noted this week that Chinese steel consumption sank 7% in December, outpacing a meaty 2.6% decline in domestic production. This naturally bodes ill for BHP Billiton, which is one of the world’s largest iron ore producers and which sources 80% of operating profit from the steelmaking ingredient.

UBS commented that “the correction represents one of the largest declines in Chinese steel consumption in recent years, and does not bode well for 2016.” It added that “we expect steel consumption to keep falling at a faster rate than production growth, while cautioning that risk remains to the downside due to continuously weak construction activity.”

And BHP Billiton is also facing the prospect of further price weakness across other major commodity classes. Indeed, the company booked $7.2bn worth of oil asset writedowns this month, made as the Brent value hit fresh nadirs not seen since 2003.

BHP Billiton was forced to issue a hybrid bond last year to repair its deteriorating balance sheet. But as raw material prices continue to tank, a swathe of additional measures — from draconian dividend cuts to additional capex scalebacks — are being called upon by the City.

The likes of Glencore and Anglo American have already been forced to scrap the dividend in recent months, and the number crunchers expect BHP Billiton to follow suit. Last year’s 124 US cents per share reward is expected to fall to 110 cents in the 12 months to June 2016.

A 9.8% yield may prove tempting for many, but I believe savvy stock pickers should give this projection scant regard. Indeed, the predicted dividend still dwarfs estimated earnings of 48 cents per share. And with supply/demand balances still worsening, I don’t believe BHP Billiton will be in a position to get dividends chugging higher again any time soon.

Bank suffers a bruising

Banking goliath Santander (LSE: BNC) is also proving an increasingly-spooky stock for dividend hunters in my opinion.

Back in January the firm vowed to slash the dividend for 2015 to 20 euro cents per share, a vast reduction from 60 cents in previous years, but a measure designed to rebuild Santander’s fragile finances.

With the balance sheet rebuilt, it looked likely that the bank would get dividends moving higher again from this year onwards. But Santander’s shocking results release on Wednesday has put such sentiments on ice.

The bank announced that it suffered one-off charges during October to December amounting to a colossal €1.44bn, around half of which was related to the mis-selling of PPI in Britain. With conditions in its Brazilian marketplace also worsening, Santander recorded net profit of just €25m in the quarter, crashing from €1.46bn in the corresponding 2014 period.

Sure, Santander’s capital base may still be improving — the firm’s fully-loaded CET1 ratio edged to 10.05% as of December from 9.85% three months earlier. But should economic conditions in key markets continue to deteriorate, the bank’s bid to organically bolster its capital ratio may spectacularly hit the buffers, a potentially-disastrous scenario for dividend seekers.

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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.