Much has been written about how record low interest rates are punishing savers but few people can complain about the plentiful yields of around 5% and 6% available on the FTSE 100 today. However, as you consider where to invest, you need to look at the stories behind the yields as some are more solid than others.
Two numbers jump out at me when I look at insurance company Aviva (LSE: AV). First, the share price is down 18% over the past year. Second, it nonetheless trades at a pricey valuation of 18.44 times earnings. Naturally, this is down to a sharp drop in earnings per share (EPS), which fell 53% in 2015, although they’re now forecast to rise a whopping 96% in the current year, and another 10% in 2017.
This suggests that Aviva isn’t as overvalued as it first seems, a view confirmed by its forecast valuation of just 8.7 times earnings. Better still, it currently yields 5%, and this is expected to grow to 5.6% by the end of this year, and 6.2% by the end of 2017. Dividend cover is currently a narrow 1.1, but management remains progressive, announcing a 10% rise in the interim dividend to 7.42p a share earlier this month. With a 30% increase in first-half operating profits to £1.325bn, the dividend looks solid for now.
A high yield isn’t everything, of course. You need a successful company to back it up and keep the cash flowing. Unfortunately, international media and education company Pearson (LSE: PSON) hasn’t been successful lately, its share price falling 36% in the past three years. Investors hoping for a turnaround will have been disappointed by its recent first-half interims, which revealed a 7% drop in underlying sales to a worse-than-expected £1.866m, and a drop in operating profit from £39m to £15m.
Pearson has been hit by falling college enrolments and shrinking demand for vocational studies, as well as collapsing demand for textbooks in South Africa. Chief executive John Fallon is fighting back by cutting 4,000 of the headcount and simplifying the business after his predecessor Marjorie Scardino’s ill-fated acquisition splurge, but the turnaround will take time, even if it does succeed. EPS are forecast to drop 21% this year, although may bounce back by 16% in 2017. Today Pearson yields 6%, covered 1.4 times, but dividends aren’t guaranteed and should come under pressure unless Fallon’s fightback bears fruit.
Few investors buy utility giant SSE (LSE: SSE) for its electric growth prospects but a dividend that has consistently hovered around 6% has provided ample compensation, as it does today, trading on a current yield of 5.87%. However, there is a question mark over how sustainable this is, and cover now looks a little thin (although not yet disastrously so) at 1.3.
SSE is being menaced by regulatory attempts to boost competition and provide alternatives to the big six, and it lost 50,000 gas and electricity customers in the three months to 31 March, although it still boasts 8.16m customers. Brexit will add to the financial, regulatory and political environment uncertainty. Planned capital and investment expenditure of up to £6bn over the next four years will prove a drain, and unless cash flow significantly improves, its proud record of always increasing the dividend since 1992 could be under threat. However, it’s still forecast to yield 6% in March 2018, manna for today’s savers.
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Harvey Jones has previously held shares of Aviva. 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.