Right now, the FTSE 100 is full of attractive looking income stocks that I would happily include in my portfolio today.
However, there are also quite a few companies in the index that I wouldn’t touch with a bargepole. Today, I’m going to highlight three of these FTSE 100 dividend stocks that I would sell immediately.
In my opinion, utility group Centrica (LSE: CNA) is one of the worst run businesses in the FTSE 100. Over the past decade, the company has lurched from mistake to mistake, destroying billions of pounds of shareholder value along the way.
Shareholder equity, which gives us a rough guide as to how much value a company has created for shareholders, has decreased from £5.2bn to £3.2bn over the past five years. Over the same time frame, shares in Centrica have underperformed the FTSE 100 by around 19% per annum. Over the past decade, the stock has underperformed by 10% per annum.
And it doesn’t look as if this performance is going to come to an end any time soon. City analysts are expecting the company’s earnings per share to fall 41% for 2019 to 8.8p putting the stock on a forward P/E of 10.7, which looks slightly expensive for an enterprise with falling earnings. At the same time, I can’t see how Centrica can continue to maintain its dividend, which is only just covered by earnings. With this being the case, I would avoid the stock and its 9.1% dividend yield at all costs.
Stormy times ahead
I’m also worried about the outlook for SSE (LSE: SSE). While this company might immediately look attractive as an income investment with a dividend yield of 9.3% at the time of writing, the firm is slated to reduce its distribution by 18% next year, which will leave it yielding 7.7% at current prices.
Unfortunately, I don’t think this is going to be the last time SSE will have to reduce the distribution. For the past five years, the company has been paying out more than it can afford to shareholders and, as a result, net debt has nearly doubled.
SSE cannot continue on this trajectory forever. With regulators and policymakers cracking down on what they see as large profit margins in the utility industry, SSE may be forced to rethink its dividend policy to protect the overall business — that’s why I’m staying away, there are just too many risks here.
The last former income champion that I believe investors should sell without hesitation is Marks and Spencer (LSE: MKS). At one point last year, this company supported a dividend yield of nearly 7%, but with earnings falling, management has decided to reduce the distribution to free up more capital to reinvest in the business.
Last week, along with announcing a £601m rights issue to fund a joint venture with online grocer Ocado, M&S also revealed that it is cutting its full-year dividend by 25.7% to 13.9p per share.
I think it’s strange that M&S is keeping its dividend at all. Asking shareholders for cash to fund a joint venture, and then paying a portion of this cash back to them via a dividend, seems to suggest management isn’t really committed to the turnaround. A 9.9% year-on-year drop in pre-tax profit for the recently concluded financial year is another reason why I think shareholders should dump the struggling retailer.
Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.