In recent days I’ve discussed some of the FTSE 100’s biggest dividend hitters that could sink in 2019 and drag the broader index down with them.
There’s a galaxy of reasons why the miners, oil producers and tobacco manufacturers could all find themselves on the defensive next year and possibly beyond. Brexit isn’t one of them, but it is an issue that could cause the following income shares in the under-pressure retail sector to collapse in the New Year.
The signs are worrying
Unless you’ve been in a cave for the past few months, you’ll know all about the extreme stress that the retail sector has been under. Rampant competition, both on the high street and online, has long been a problem for the country’s smallest and biggest retailers, but the collapse in consumer confidence caused by the UK’s possible withdrawal from the European Union has thrown a tanker full of fuel onto the fire.
The controversial chief executive of Sports Direct Mike Ashley gave a sobering assessment of the sector in a letter to Debenhams head Sergio Bucher last week. Commenting that “November was the worst November for retailers in living memory,” he went on to suggest that conditions may remain difficult as “there isn’t any good news out there.”
Recent trading data has given plenty of credibility to his dire commentary too. Last week a report co-commissioned by the British Retail Consortium (BRC) and Springboard showed that footfall across Britain’s high streets, shopping centres and retail parks plummeted 3.2% last month, the biggest November drop since the footfall report started in 2009.
A symptom of Black Friday and its ubiquity online that dents interest in the physical realm, sure. But there’s no disguising that the shocking figures are a reflection of the rising pressures on shoppers’ spending power which threatens to spill into the New Year and potentially well beyond.
As BRC chief executive Helen Dickinson commented: “It has been a difficult year for many retailers and the outlook remains challenging as Brexit uncertainty grows. Retailers will be following the upcoming parliamentary vote closely and hoping Parliament can secure a transition period to allow businesses time to adapt to life outside the EU. Without this transition, consumers face higher prices and less choice on their shopping trips.”
Avoid these hazards
In the current environment it’d take a braver man than me to pile into some of the Footsie’s quoted retailers regardless of their gigantic dividend forecasts.
Let’s look at Marks & Spencer, for one. It’s a share that offers a gigantic 7.1% forward dividend yield, but it’s still not a tempting destination for me at the moment. The competitive pressures that have long hammered demand for its clothing lines have spread more recently to its food operations, and the situation is likely to get worse as broader economic conditions intensify and uncertainty persists.
Speaking of which, the rising popularity of value food retailers Aldi and Lidl would also force me to disregard J Sainsbury and Morrisons and their inflation-beating 3.9% and 3% prospective yields, as well as Tesco’s recently-resurrected dividend policy. The German chains are likely to see footfall booming at the expense of their Footsie rivals as their expansion plans come to fruition and shoppers are forced to increasingly count the pennies.
