‘If it seems too good to be true then it probably is’. A well-trodden phrase but one which can be applied to stock markets in a variety of ways, none more so than when considering the monster dividend yields offered by many London-quoted stocks.
Take SSE, for example. This is a stock that continues to seduce share pickers on account of its monster 7% yield and storied dividend history, the company having hiked the dividend for 20 years on the bounce. But the excellent earnings visibility that has underpinned this policy is coming under increasing threat as the growing number of smaller, cheaper independent suppliers chips away at its client base.
This isn’t the only worry for SSE, however, as politicians and consumer groups take the fight to the electricity suppliers on accusations of overcharging their customers. The electricity providers aren’t the only dividend favourites under threat of profits-crushing regulatory action or even nationalisation, however, with those other dependable dividend stars, the water suppliers like United Utilities, also in the crosshairs.
If the utilities operators, formerly bastions of safety for those seeking dependable earnings and thus dividend growth are coming under pressure, then surely stock pickers really need to be on their toes if they want to avoid getting burned.
Another dividend aristocrat — that is, a company that has lifted dividends consecutively for at least a couple of decades — which is coming under increasing strain to slash shareholder rewards is PZ Cussons (LSE: PZC).
The FTSE 250 firm’s bottom line has been bashed to-and-fro for the past couple of years on account of tough trading conditions in its markets, and particularly in the inflation-battered territory of Nigeria.
Indeed, Cussons announced this week that pressures in the African nation caused group pre-tax profit to slump 22% in the 12 months to May 2018, to £80.1m. And this caused the company to finally slay its age-old progressive dividend policy and hold the dividend at 8.28p per share.
There could be more pain to come in the near term as well, chairwoman Caroline Silver predicting “another challenging year”. This, combined with its rising debt pile (net debt rose to £165.4m last year from £143.8m a year earlier), could well result in the household goods giant slashing the payout in the current fiscal period.
A solid selection
I remain bullish about Cussons’ long term prospects thanks to its exceptional emerging market presence and broad suite of much-loved household products, which means I would be happy to hold the share right now. In the face of a possible dividend cut, however, investors may prefer to buy into another dividend aristocrat today, such as Bunzl (LSE: BNZL).
The FTSE 100 support services play has lifted the annual payout for 25 years on the bounce, and on account of its broad geographic footprint and broad range of products and services offered across a wide range of industries, it has the diversity to keep profits — and thus dividends — on a northwards path.
Latest trading details cemented my bullish take on the business too, Bunzl advising in June that group revenues are anticipated to have risen 11% in the first six months of 2018. With its markets remaining strong and the company having the financial strength to keep earnings-boosting acquisitions coming, I reckon the business is in great shape to continue lifting the dividend long into the future. For me it remains a top-notch buy.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK owns shares of PZ Cussons. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.