We live in crazy times when many UK leading companies are trading on yields an incredible 28 times base rate. Back in the day, when interest rates typically hovered around 5%, this would have been the equivalent of yielding income of an incredible 140% a year. Dream on. These three top FTSE 100 names yield between 5% and 7% but are their vertiginous income levels sustainable?
Today, oil giant BP (LSE: BP) yields a whopping 7.1%. At this rate of return you’d double your money in just 14 years from the dividend alone, with all capital growth on top. The share price is also up 26% over the last six months, driven by the oil price recovery since January’s shocking $27 a barrel low. However, with crude struggling to hold above $50, investors can’t rely on more to come.
Like all oil sector companies, BP has been slashing costs and canning capex. It recently posted a Q2 profit of $720m, down from $1.3bn on year earlier. Management is standing by the dividend, leaving it unchanged at 10p per share. Forecast earnings per share (EPS) growth of a whopping 137% in 2017 should provide some relief after this year’s no-show, but until oil climbs above $60 and stays there, the dividend remains under siege. Still, even if BP chopped it in half, you would still be getting 14 times base rate.
Hold on to HSBC
Asia-focused bank HSBC Holdings (LSE: HSBA) may have escaped a bailout during the financial crisis but it hasn’t avoided subsequent banking stock misery. Its share price is trading at roughly the same level it was five years ago, during which time the FTSE 100 has risen more than 30%. However, there has been a post-Brexit revival, with the stock up more than 20% over the last three months.
Its current yield of 7.1% excites and this is better funded than many on the FTSE 100 with cover at 1.3times. Trading at 11 times earnings, its valuation isn’t too testing either. Earlier this month, HSBC announced further rewards for loyal shareholders in the shape of a $2.5bn share buy-back, and a renewed commitment to its current dividend of 51 cents. HSBC has been hit by the Asia slowdown but is nonetheless increasing its focus in this region, which should prove rewarding in the longer run. With underlying profit before tax falling 14% to $10.8bn the turnaround will take time, but the income should make the wait worthwhile.
Investors in insurer Standard Life (LSE: SL) have had a better much better time of it, with the share price up 85% over five years. However, it has retreated over the last 12 months, falling 15% due to wider stock market uncertainty. I called Standard Life an insurer but the truth is it’s now a fee-based asset manager, which arguably makes it more volatile and exposed to market shocks.
First-half results show operating profits before tax up 18% to £341m, and underlying cash generation improving 10% to £254m. Standard Life has been hit by falling annuity sales but there have been compensations as more retirees turn to income drawdown. Dividend policy is progressive, with the payout recently lifted 7.5% to 6.47p per share, even though the current 5.1% yield is covered just 0.7 times. My only doubt is that it’s expensive at 26.6 times earnings, although forecast EPS growth of 92% this year and 10% in 2017 should help even things out.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended BP and HSBC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.