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Lloyds Banking Group plc vs BP plc: dividend heroes or villains?

The strong likelihood of the UK economy experiencing increasing turbulence makes me fearful over dividend growth at Lloyds Banking Group (LSE: LLOY) this year and beyond.

At first glance my fears may appear absurd: after all, the banking goliath raised the ordinary dividend from 2.25p per share in 2015 to 2.55p last year, while also forking out a special payment of 0.5p.

And the City expects rewards at Lloyds to remain on a sharp upward curve, a 3.7p dividend predicted for 2017 and 4.3p for the following year. These predictions yield 5.3% and 6.2% respectively.

But I believe investors should be wary of Lloyds’ touted earnings prospects in 2017 — a 141% jump is currently predicted — and with it hopes of abundant payouts now and in the future. Key gauges like consumer spending and business investment are already beginning to decline, and could worsen still further as the Brexit saga rolls on.

And while Lloyds’ balance sheet is stronger than many of its peers, clues that PPI-claimant activity is gathering pace again could also put pressure on the bank’s ability to keep delivering monster dividends.

Crude catastrophe?

I am also fearful over the dividend outlook over at BP (LSE: BP). Last November’s OPEC supply freeze accord was expected by many to represent a game-changer in addressing the oil market’s heaving supply imbalance.

But the removal of large swathes of extra production materialising from the cartel, as well as from some non-OPEC members like Russia, is simply being filled by the once-again-resurgent US shale sector. And growing output from other major producers like Canada and Brazil is also putting to the sword hopes that heaving stockpiles will be obliterated later this year.

And these concerns put the Brent benchmark back under the critical $50 per barrel maker for the first time in four months earlier this week.

Still, this sign of increasing crude supply is not the only cloud hanging over ‘big oil’ as demand for green energy is also accelerating. Indeed, new global solar panel capacity jumped 50% in 2016, to 76 gigawatts as sales to the US and China exploded, recent data from trade association SolarPower Europe showed.

These factors leave the earnings outlook for likes of BP on extremely fragile ground, and with it the chances of market-stripping dividends lasting long into the future. And the company’s capex-hungry operations also put payout predictions under significant pressure. Net debt shot to £35.5bn as of December from £27.2bn a year earlier.

City analysts predict that BP will keep dividends locked around 40 US cents per share through to the close of 2018, meaning the business sports a vast 6.7% yield.

But I reckon exceptionally poor dividend cover during this period — this year’s projected payout actually surpasses estimated earnings of 35 cents — could see forecasts miss the mark, particularly if the supply/demand outlook continues to darken and puts oil prices on the back foot once more.

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