With iron ore prices continuing to whipsaw, I reckon BHP Billiton (LSE: BLT) faces the prospect of further share price weakness heading into April.
There is no doubt that the steelmaking component could continue its sudden uptick of recent days, the material moving back above the $90 per tonne landmark last week. But holding commodity stocks with great exposure to such severe price turbulence is always risky business, and in my opinion the murky supply/demand picture in the iron ore segment would encourage me to sell BHP Billiton right away.
While commodities glutton China continues to ship in huge amounts of iron ore, the scale of port-held inventories indicates that demand is not as strong as these headline figures suggest. And a steady ramping up of global production is exacerbating claims that ore prices are currently overcooked.
However, the ever-present threat of shaky fundamentals is not the only factor that could send values of BHP Billiton’s products lower again.
Should the US economy continue to strengthen, expectations of Federal Reserve rate hikes exceeding current expectations in 2017 and 2018 would gather pace, a situation that would strengthen the dollar and may hamper demand for greenback-denominated goods further.
City analysts currently expect BHP Billiton to bounce from two consecutive earnings dips with a 531% explosion in the year to June 2017. However, with iron ore prices clearly less than robust, I believe these expectations are in danger of significant downward revisions.
And this also leaves BHP Billiton’s dividend forecasts looking less than secure. The mining ace slashed the dividend to 30 US cents per share in fiscal 2016. But the number crunchers expect this year’s anticipated earnings surge to drive payments higher again — an 83-cent dividend is currently forecast, yielding a mouth-watering 5%.
But with the payout covered just 1.7 times by predicted earnings (below the safety benchmark of two times), and net debt standing at $20.1bn as of December, I reckon investors should put little faith in the prospect of meaty dividends from BHP Billiton now or in the future.
A murky revenues outlook at The Restaurant Group (LSE: RTN) also makes me less-than-convinced by generous dividend projections there.
The Square Mile expects the Frankie & Benny’s owner to get dividends moving higher again from 2017, the company having slashed the dividend to 15.84p per share last year from 17p in the prior period. A reward of 16p is currently estimated, yielding a handsome 4.5%.
But predictions of an extra 18% earnings drop this year illustrate the massive challenges The Restaurant Group faces to get punters moving back through its doors.
Chief executive Andy McCue conceded last month that, despite the introduction of group-wide restructuring, “it will take time to effect the scale of change required and for customers to respond.” Like-for-like sales at the firm slumped 3.9% in 2016.
And with the prospective dividend covered just 1.4 times by predicted earnings, I for one believe cautious investors should consider stocking up elsewhere for their income fix.
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.